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Brazil’s Disappointing Equity Market

This article was taken from another site (see link below) and posted on this blog by Michael Leitch for EDUCATIONAL PURPOSES


The magic of Lula and free money has worn off on Brazil.  When compared to nearly every major emerging market in the world, Brazil’s stock market is the worst performer this year.

The popularly traded iShares MSCI Brazil (EWZ) exchange traded fund is down 4.3% year-to-date while the MSCI Emerging Markets index is up 3.39%.

Gone are the modern-miracle days of two term president Luiz Inacio Lula da Silva, a poor northeastern labor union activist who oversaw one of the brightest moments in the Brazilian economy since the bossa nova days of the 1950s and the politically unsavory times of the dictatorship’s “miracle years” of the 1970s.  Cheap money flowed into Brazil, aided by rumors of an upgrade to investment grade status for the first time in the nation’s history; to massive deep sea oil finds by national oil giant Petrobras.  Today, continuous oil finds, even lower interest rates, and stable government debt that’s still ranked BBB+ has not done much to convince investors to hold Brazilian stocks for too long.

“I own no equities at all in Brazil,” says Heiner Skaliks, fund manager at the Strategic Latin America Fund (SLATX) in La Paz, Bolivia. “I prefer Mexico over Brazil.”

Even strategists at Brazil’s own Itau BBA, one of the country’s biggest investment banks, told me recently that Brazil was a tough sell.

The BM&F Bovespa stock exchange started off well, but quickly lost power by the end of the first quarter.  Despite record low values for big names like Petrobras and Vale, both trading under 6 times earnings, Petrobras is looking like it is ready to trade in the teens when just three years ago Goldman Sachs had a price target of $60.  Vale is down 9.23%, underperforming the index, and its biggest competitors Rio Tinto and BHP Billiton by at least 500 basis points.

Brazil’s equity market has been one big disappointment for much of the last year, actually. EWZ is down over 20% in the last 12 months. Brazil stocks suffered from inflation in 2011. When higher interest rates and as low global growth cut into inflation, the government quickly lowered interest rates and investors returned to Brazil stocks at the end of the year. Their interest didn’t last long.

Savvy emerging market investors are looking beyond the big four emerging markets for faster growth.  Luckily, they’ve been getting it.


Brazil Stocks Will not Repeat 2009 Gains: Video


‘Equity Market’ –The market in which shares are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance.

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