Slow growth, protests, and a humiliating defeat against the Germans in the World Cup earlier this month hasn't soured investor sentiment on Brazilian equities. Over the last four weeks, Brazil's stock market as measured by the
The same can be told when looked at three months out, with the iShares MSCI Brazil (EWZ) exchange traded fund up 8.9%, beating the MSCI World and the MSCI Emerging Markets Index.
Who cares if GDP is expected to come in under 2% again this year, or that a hotly contested election is just three short months away. Brazil is the cheapest market in Latin America.
On a price to earnings basis, Brazil investors are getting more bang for their buck there than in Mexico, Chile, Colombia and even the United States.
"Brazil's p/e has made it an attractive investment right now," says Raphael Juan, a fund manager at BBT Asset Management in Sao Paulo.
Brazil's 12 month forward price to earnings is around 10.8, while Chile's is 14.8, Mexico's is 18.6 and Colombia p/e is 17 times. The price to earnings ratio for the U.S. equity market stands at around 16.
Comparing price to earnings ratios in markets as different as Brazil and Chile can be an exercise in futility. But for now, investors are grabbing cheap equities and not worrying too much about value traps. Sometimes, of course, stocks are cheap for a reason. The rapid rise in Brazil equities comes with a fair amount of political risk.
Brazilians go to the polls in October. What once seemed like an easy victory for incumbent Dilma Rousseff is no longer a certainty. She will undoubtedly face a run-off vote with Aecio Neves of the rival Social Democratic party. Dilma's Workers' Party has been in the Presidential Palace for 12 years and Brazilians -- especially those south of Sao Paulo state -- are looking for a change. Dilma was consistently booed during her appearances at FIFA World Cup matches, suggesting the middle class and rich soccer fans won't be voting for her.
The labor market, which helped propel the Workers' Party to stardom over the years, remains strong. Low unemployment, coupled with Brazil's successful social welfare programs in the poor northern half of the country, could still hand Dilma a second term.
Pedro Paulo Silveira, the chief economist for TOV Corretora, a Sao Paulo brokerage, warns that the job market is not as good as it once was. And Brazilians are feeling the pinch. Dilma could suffer as a result.
"The creation of new jobs has been in decline since it peaked in the recovery of 2010," he says. "We've seen the numbers dropping since 2013, with last year being the worst year for new jobs since 1999. The tendency is for the economy to decelerate in the second half, not only because of the elections but also because of the limits of monetary and fiscal policy, and the continued crisis in Europe," he says.
Silveira thinks Brazil's GDP will come in under 1% this year and closer to 1% next year.
Investors can ignore the fundamentals. We call that cognitive dissonance.
Consumer prices in the first half of July were 6.5% higher than a year earlier. Inflation was 0.01% slower than the previous release. Inflation in Brazil continues to narrowly exceed the top of the Central Bank of Brazil's 2.5-6.5% target range.
While inflation is still high, the current sharp weakening of the Brazilian business cycle should dampen domestic demand and price pressures if sustained in the months ahead, warns Bill Adams, senior international economist for PNC Financial Services Group in Pittsburgh.
The most recent demonstration of the weakness of the Brazilian economy was last Thursday's release of monthly services receipts for May, which were up 6.6% from a year earlier, barely faster than the 6.4% year-ago rise in consumer prices in the same period - which is to say, the volume of services sold in Brazil was almost stagnant from a year earlier in May.
"The question is, how long will Brazil's economy have to stay weak to bring price pressures under control?" Adams asks. "The continued rapid increases of sticky prices of services like medical services and education suggest that high inflation will persist through the end of 2014 at least. High inflation prevents the Central Bank of Brazil from cutting rates and supporting the economy -- and if stronger global demand translates into a less-weak Brazil by year-end, the Brazilian central bank may have to hike again."
So for Brazilian equities, it may be a question of sell them while they're hot.
"Neves might win, though he is really no better than the current occupant of that office," says Peter Kohli, CEO of DMS Funds in Leesport, Pa. "Neither Rouseff nor her challenger have said how they plan to put Brazil back on a path of economic prosperity. By the way, Brazil fired its football coach. Could this be a harbinger of what’s to come?"
