Sao Paulo, Brazil
Wednesday, 11 December 2013
The Dow fell 52 points yesterday. Gold was up $26 an ounce.
Good news? Bad news? Bad news as good news? Good news as bad news? Bad news as good news as bad news?
GDP is growing faster than expected. So the Fed will taper, right? But GDP growth is largely an illusion because it is mostly unsold products stacking up on shelves. Bad news means the Fed won’t taper, right? So, it’s good news after all. Or is it…?
Aw, shucks… we don’t know. So, we’ll turn to something else.
“What’s the outlook for Brazil?” we asked our colleague Rodolfo Amstalden of Empiricus Research in Sao Paulo. It was raining outside. We were in his new digs, overlooking the fashionable Itaim district.
“That depends on who you talk to,” he began. “But to us it looks terrible. We’re warning investors to watch out for a ‘perfect storm’ that could flatten share prices on the Bovespa.
“You have to realize that shares have lost 17% this year. And they’re down 30% from their high set in 2008.
“But that doesn’t mean they’re cheap. The average P/E is still about 17 – not too far away from the US average.
“And here’s what could happen in 2014…
“First, we’re very sensitive to US monetary policy. And it’s likely that the US Fed could begin to taper in 2014. Even if it doesn’t, the fear of tapering is likely to send Brazilian stocks lower.
“Second, if you’ve been following the story closely, you may have learned that the government is on a spending spree and Brazil’s bonds could be downgraded.
“They’re currently two grades above the investment level threshold. So a single downgrade wouldn’t hurt us much. But it could do a lot of damage to the stock market. And two downgrades, taking them below investment grade, might be catastrophic.
“To make things worse, there’s a national election next year. Unless Brazil loses in the World Cup Soccer Championship next year, Dilma (current president Dilma Roussef) will almost certainly win. She’s buying votes all over the country by giving money away. She’s not going to be good for business or the stock market.
“A country like Brazil has a great number of advantages. Compared to the US, our population is much younger, for example. The US enjoyed its heyday as the baby boomers went through their 40s and 50s. But Brazil’s heyday is still ahead. Our biggest population cohorts are still under 30, not over 55 as they are in the US.
“Brazil has plenty of resources, too – oil, water, food-producing land – but that is an old story. That was the old Brazilian economy. The new economy is based on manufacturing and retailing… servicing this huge new middle class that is being created here. That’s why investors should do well in Brazilian equities over the long term. But not necessarily the short term.”
Brazil is a country that should prosper. But every generation has told itself that “Brazil is the country of the future.” Each time, the government got to work and prevented the future from happening.
That may be over now, however. This time, the combination of new technology, capital formation, and demographics may be too strong for the Brazilian feds to control.
Brazil’s Falling Wedge
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners