Brazilian equities have suddenly outperformed after trailing for a large part of the year. Since the end of August Brazil’s stock market has outperformed all other countries in the Latin America universe and has also widely outperformed the broader global and emerging market (EM) equity indices.
Three main drivers have contributed to the strong performance of emerging market assets and Brazilian equities. First, the US Federal Reserve’s (Fed) decision to postpone their planned ‘tapering’ of quantitative easing has ended speculation about a stronger US dollar and weaker EM currencies and bonds. This has led to strong rallies in local currencies and the stock markets of emerging market countries such as Brazil, India and Turkey that had suffered during the market sell-off earlier this year. The Brazilian Real was further supported by the central bank stepping in and intervening in the currency market. Second, Chinese economic data started to improve and countries with good export links to China have performed well. Finally, the Brazilian economy has started to show early signs of stabilisation – recent retail sales numbers have shown improvement and higher iron ore prices have boosted commodity-related industries.
The headwinds for this Latin American country are all well-known by investors – the economy has been growing below trend in recent years and the government remains stubbornly interventionist. It should be highlighted, however, that two of the three factors supporting Brazil in recent months are likely to remain in the near future i.e. the Fed further delaying tapering and stronger Chinese data. Furthermore, investor positioning in Brazil remains light and any marginal improvement in market sentiment is likely to lead to strong movements in equity prices. We believe that the contrarian case for Brazil remains based on its comparatively low equity valuations and sensitivity to any cyclical upturn in the fortunes of its main trading partners such as China and the US.
Opinion column by Christopher Palmer, Director of Global Emerging Markets at Henderson Global Investors.