Brazil is under some pressure. From corruption scandals, social unrest that is calling for the impeachment of a president and volatility in the financial marketplace, there is a challenging road ahead for one of the world’s economic powerhouses. The good news is that the tide is turning for Brazil, both on economic and political grounds, and investors worldwide are taking notice.
Brazilian President Dilma Rousseff’s attempt to bring her predecessor, Luiz Inácio Lula da Silva, into her cabinet last week as he faces corruption charges has backfired on the government and ratcheted up calls for her impeachment. With the economy in recession (a projected growth for 2016 at -3.5%) and much of the coalition implicated in a corruption scandal, the president has become a symbol of trouble for Brazil. All eyes are now on the future of Rousseff’s administration and whether a new government would be better equipped in dealing with some of the country’s more pertinent issues.
It’s important to remember that Brazil’s recent malaise economically and politically is mainly the result of drastic external conditions that are affecting the majority of developing nations around the world (including China). Now that these conditions are changing, with the oil price rebounding and global stocks rising, the prospects for these net-exporting regions of the world are increasing rapidly.
According to Bloomberg investors have added $2.72 billion to emerging market stocks and bonds last week alone. This has occurred at a time when the US Federal Reserve’s dovish stance of rising interest rates threatens to weaken the dollar in the near term and support the demand for higher yielding assets in emerging markets. Indian equities extended a three-week rally and bonds gained for an eighth day as the country’s central bank is on the verge of cutting borrowing costs. Brazilian shares rose to the highest level since July as higher commodity prices helped extend gains driven by prospects for a change of government. The Ruble gained 0.8% as Brent crude traded above $41 a barrel.
“Brazil has some headwinds to overcome, but a bunch of factors from market volatility to the government’s inability to get very much done has lowered valuations to really attractive levels.” Said Brett Diment, Head of Emerging Market Debt at Aberdeen Asset Management in London.
The Brazilian economy is showing signs of recovery. Improvement in Brazil’s current account, with a 43% decline in the deficit to $58.9 billion in 2015 compared with 2014 and the fact that foreign direct investment now covers 127% of that deficit is a very good start. With inflation past the peak, the Real at depreciated levels and growth contracting at a slower pace than before. This positive outlook was sparked by 0.4% growth in industrial production in the country compared with the same period last year. As a result, investment managers ranging from Schroders, Aberdeen Asset Management and Amundi Asset Management have all increased their exposure to Brazilian assets over the past few months.
Brazil is on the path of recovery, both on economic and political grounds, and investors are taking notice. As the planet’s seventh largest economy, home to a fifth of its population and the fourth largest producer of agricultural products, Brazil’s fundamental attractiveness and potential as a sound investment destination remains firmly in place. Despite the recent challenges, Brazil has a historic trend of social and economic development that will strengthen performance and prospects in the country for the long term.