Dilma’s Fading Fortunes Boost Brazil’s Stock Market

News today that Brazilian President Dilma Rousseff lost ground in yet another poll has added to speculation that she will struggle to win the presidential election slated for October.

Her misfortunes, however, fuel gains for the Bovespa Index. Brazil’s stock market has climbed 15% during the past month despite a credit downgrade from Standard & Poor’s. In fact, the Bovespa has climbed each time the incumbent’s approval rating has taken a hit.

Often times, political uncertainty can unsettle a market. And some think a new government may usher in reforms to improve Brazil’s worsening economy.

In Rousseff’s first term, Brazil fell into stagflation and the equity market fell by nearly half. And opposition is growing to her populist policies, such as capping fuel prices that the state-controlled, loss-making Petroleo Brasileiro (PBR) can charge.

Averaging 2%, Brazil’s GDP growth has been the weakest under any president since Fernando Collor de Mello, according to Capital Economics. Yet inflation hasn’t fallen, sitting at 6.1%. Brazil’s account deficit has widened sharply, leading to a bigger budget deficit and more private sector debt.

Capital Economics Chief Emerging Markets Economist Neil Shearing and his team recently wrote:

Bringing all of this together, expectations at the start of President Rousseff’s term in office that Brazil was primed for take-off have proven to be well wide of the mark. Economic growth under Dilma has been weaker than under any president since the early 1990s. At the same time, inflation has remained stubbornly high, the current account and budget deficits have widened and the economy appears to have developed a dangerous reliance on credit to sustain demand….The result is that Dilma’s first term in office is likely to remembered as one in which Brazil’s star faded. Assuming she triumphs in October, reviving the economy’s fortunes during a second term administration will depend on Dilma’s ability to push through the reforms that have been shirked over the past four years.

But hope is rising. The U.S.-listed ADRs for Petrobras have climbed 29% over the past month, while share of Centrais Eletricas Brasileiras (EBR) have climbed 71% during the same span.

The iShares MSCI Brazil Capped ETF (EWZ) rose 19% during the past month.

Content provided by: Shuli Ren, CFA - Barron’s / Emerging Markets Columnist and Blogger / Twitter: @shuli_ren

Tags: brazil, dilma, emerging markets, inves
Posted in LatAm, Consulting, Politics Risk, Wealth Management