01 MAR

2018

Equities , Topics

Brazil: a journey of a thousand miles begins with one step

It’s been one hell of a ride. Brazil’s macroeconomic picture has changed considerably since Dilma Rousseff’s impeachment about 2 years ago. The country was able to overcome overall mismanagement and the large imbalances generated by exotic policy experiments while simultaneously  having to deal with the biggest corruption scandal in its history. 

The current government is no saint, but was able to put in place a high-calibre economic team and pass a series of mini-reforms in congress that put Latin America’s behemoth back on investors’ radar. Brazil is currently in a sweet spot in the economic cycle and operating within a set of orthodox, conventional policies. Growth has peaked considerably this year, labour market dynamics and consumer confidence are rising while interest rates sit at all-time lows, thanks to tamed inflation and a well-anchored currency. 

And yet, more progress needs to be made in order to stabilize the debt trajectory, with the highly unpopular pension reform now under discussion playing a key role in the process. Timing is not ideal, as short-sighted politicians worry about this year’s election. Investors have been complacent, hoping that this will be solved tomorrow if not today. 

Everybody wants a shot. Lula’s upheld conviction of corruption and money-laundering virtually eliminated an important tail risk for markets. In a scenario in which nobody else stands out, even President Temer is betting on a next term despite a timid 5% approval rate. With the exception of Congressman Bolsonaro, the other hopefuls are in the embarrassing single-digit range in discredited polls. With ballots expected in October only, this will be the most open presidential race in decades! 

Chronic corruption and a failed political system, violence and third-world public services and infrastructure remain long withstanding issues to be addressed. However, every journey begins with one step and it feels like the worst has been avoided, with investors’ sentiment turning more positive. Despite the good run last year, Brazil lagged its peers and we see upside potential for specific stocks on the back of improving fundamentals.