The Bovespa, the short-hand name for Brazil’s index, has been steadily rallying since January 2016, in fact finding a bottom ahead of more developed markets such as the FTSE 100 and the S&P 500. Emerging market stocks suffered a difficult year in 2015, and Brazil was no exception, as expectations of the first Federal Reserve rate hike in years took firm hold. In the event, a rate hike did come to pass in December, but since then the Fed has opted to hold fire, a decision that will likely remain with us for some time to come given the UK’s decision to leave the European Union.
Political uncertainty has dogged the Bovespa so far this year. President Dilma Rousseff’s suspension in May was the culmination of months of political manoeuvring. Corruption is still widespread in Brazil, which has not helped the economy, and it looks like the probe into wrongdoing will widen.
In addition, the outlook for the Olympics still looks uncertain. There were major worries that some sites would not be ready on time, but these seem to have abated as the opening ceremony draws near.
Despite this, investors have remained keen on Brazilian stocks. The acting president, Michel Temer, has said it plans to cut the budget deficit, with the finance minister following up on this with a plan that will help the country to work towards regaining its investment-grade credit rating, which it lost last year. While a reduction in spending is potentially going to knock some points off the GDP growth rate, most investors would be happy with this if it means a more solid approach to finance by the government.
Perhaps the key stock for investors to watch on the Bovespa is Petrobras (full name Petroleo Brasileiro), the state-controlled oil producer. As an oil producer, it has suffered heavily thanks to the drop in oil prices, but with the rebound in crude prices the future looks a little brighter. Like the Brazilian government, it is seeking to shore up its own finances, although a debt pile of $126 million will take time to reduce.
Morgan Stanley has put an ‘overweight’ rating on the company, noting that better fundamentals and improved oil prices make the company a more attractive investment. The bank thinks oil prices will hit $80 in the longer-term, and so a failure to reach this would impair the investment case.
Emerging markets will likely stand or fall by what the Fed does this year, but a switch to a more dovish posture by US policymakers, and strenuous house-cleaning efforts by Brazilian politicians may make Brazilian stocks a more attractive prospect.