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Brazilian blend

Elections have shaken the Brazilian market in the past but it is a much changed country that gets ready to go to poll


The Brazilian market is exceptionally calm given it is heading towards an October presidential election.

This alone highlights the success of both the economic and political improvements the region has enjoyed over the past decade. Historically, perceived political risk in the run-up to presidential elections has destabilised Brazilian assets and currency.

Rewind to 2002 and both the Bovespa equity index and the local currency plummeted by more than 40 per cent as a result of investor insecurity over the potential outcome of the election. But now the nation has a robust economic backdrop and its citizens do not want this to change.

Brazil presently offers strong domestic growth, positive demographics, balanced economic drivers and a transparent as well as solid institutional framework. It also offers stable government finances. Apart from Chile in the Latin American region, Brazil has the most market-friendly policymaking and careful inflation targeting.

Right now, the country is experiencing strong economic growth, which this year should top 7 per cent, before moderating to around 5 per cent over the next few years. Inflation fears have been easing as the year-on-year comparisons begin to relax.

When current president Lula was first elected, there was a need to talk about radical changes. Lula had to change people’s way of thinking.Now that Brazil has a stronger economic backdrop, people want to keep it that way

Although the tightening on this monetary cycle is not over, we do not expect interest rates to be hiked materially over the coming months.

As such, the country is in an economic and investment sweet spot where the domestic economy is growing fast but not so much so that inflation is getting out of control. The global environment is weak but not so weak that it is affecting Brazil, yet it is keeping interest rates in Brazil low. This is a potentially ideal economic and investment environment.

Brazilian equities should also continue to benefit from earnings’ upgrades. Earnings per share growth for the MSCI Brazil index stands at 28.6 per cent for 2010 and 25.6 per cent for 2011. Notably, exports make up less than 10 per cent of the economy and commodities less than that as domestic demand today is becoming an increasingly important driver.

Within the equity markets, domestic stocks are particularly appealing with support from robust consumption, favourable demographics, a buoyant labour market and rising real wages. Commodity stocks should also eventually benefit when it becomes clear that hard-landing concerns over China are overdone.

Meanwhile, the market appears relatively cheap compared with its Bric peers, trading on a 2010 forward multiple of 11.6 compared with 13.8 for China and 18.7 for India.

Again, looking at the upcoming election, the simplest way to think of it this year in Brazil is to look back to when current president Lula was first elected.

For that particular election, there was a need to talk about radical changes. Lula had to change people’s way of thinking in order to get into government. Now that Brazil has a stronger economic backdrop, people want to keep it that way.

From an investor’s point of view, there does not seem to be too much to worry about. Opposition candidate Serra is trying to associate the ruling Workers Party candidate Dilma with questionable individuals in the government, while outgoing president Lula has supported Dilma. This election is really more about a choice of personalities than about radical change.


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