Brazil: Is this Emerging Market About to Be Hit by a ‘Perfect Storm’?

Good news? Bad news? Bad news as good news? Good news as bad news? Bad news as good news as bad news? GDP growing faster than expected, so the Federal Reserve will taper, right?

But GDP growth is largely an illusion because it is mostly unsold products stacking up on shelves. Bad news; 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 is raining outside. We are in his new digs, overlooking the fashionable Itaim district.

That depends on who you talk to,‘ he began. ‘But to us it looks terrible. In fact, we’re warning investors to watch out for a ‘perfect storm’ that could flatten share prices on the Bovespa.

You have to realise 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 Brazil 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 very 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 re-election. 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. While the US enjoyed its heyday as the baby boomers went through their ’40s and ’50s…Brazil’s heyday is still ahead. Our biggest population cohorts are still under 30, not over 55 as they are in the US.

Of course, Brazil has plenty of resources – 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.

We’ll see.

Regards,

Bill Bonner
for Markets and Money

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Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

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4 Comments on "Brazil: Is this Emerging Market About to Be Hit by a ‘Perfect Storm’?"

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Ross
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With carry, smoke for collateral derived ‘capital’ makes debt that pours into your nation state’s least productive assets; yet, in comparison, only trickles in to your most productive assets. To service that debt with your current account during the ’emerging market’ boom you are forced to sell your most productive national assets, and stakes in your local banks (with the local implied sovereign guarantee) that both clip that cheap debt carry ticket and pay high dividends. With reverse carry you are just forced to sell your most productive assets and protect the foreign capital invested in your banks at the… Read more »
Ross
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er the secret delete key takes its toll again… should read “coerce swaps of good for bad”

Ross
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Bender
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Don’t knock a Brazillian, at least you can see the c#nt coming!

wpDiscuz
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