Emerging market economies: Brazil

Traders and investors continue to be drawn to the emerging market opportunities of Brazil’s economy – especially the Brazilian currency and stock market. However, before placing a trade it is crucial to gain an understanding of the economic background of Brazil’s emerging economy, and the problems it has faced.

Brazil real
Source: Bloomberg

Overview of the Brazilian economy

Brazil is the largest economy in South America and ranked eighth largest in the world by gross domestic product (GDP).1 However, it is classed as an emerging market (EM) because it is still transitioning from ‘developing’ to ‘developed’ status. Brazil is part of a group of five emerging markets known as the BRICS – the others being Russia, India, China and South Africa.

Until 2010, analysts were impressed with the growth of Brazil’s economy, but in the last few years there have been a few issues that have caused traders concern about Brazil’s economic future. These problems include the conviction of former President Dilma Rousseff in August 2016, and sanctions against some of Brazil’s leading companies.

However, Brazil’s economy is still expected to see sustained growth as government reforms attempt to cap public spending, boost infrastructure projects and reduce barriers to foreign investment. The signs of this growth are beginning to show, as Brazil’s GDP grew 1% in 2017, up to $3.34 trillion, which gave the economy a GDP per capita of $15,600.

What are the biggest industries in Brazil?

Brazil’s dominant industries have propelled the GDP growth. They are:

  1. The services industry, which accounts for the largest portion of employment and almost 71% of GDP. It is made up of companies involved in sub-sectors such as hospitality, finance, retail and professional services
  2. The manufacturing industry is the second largest contributor to Brazil’s GDP, which has thrived due to its diversified nature – Brazilian companies manufacture everything from aircrafts and chemicals to food products and clothing
  3. The agricultural industry makes up just 5.6% of GDP, but is significant as commodities are Brazil’s biggest exports. Brazil is the world’s leading producer of soyabeans, coffee, cocoa and sugar, and is even one of the few countries that is self-sufficient in oil

History of the Brazilian economy

From the colonial era to the present day, the Brazilian economy has been characterised by cycles of boom and bust. At the time of independence from its Portuguese rulers in 1822, Brazil had one of the least productive economies in the world, but towards the end of the 19th century the economy was saved by a coffee boom – the rise in coffee production was so successful that Brazil became very reliant on the commodity.

From 1964 to 1985, Brazil was ruled by a military dictatorship that focused on maximising growth with little regard for the social inequalities that were rife in the country. The election of the first democratic government, in 1985, was seen as step in the right direction socially but initially did little for the economy – inflation continued to rise, peaking at 2950% in 1990.

Eventually, the government privatised dozens of industries, which led to a rise in foreign investment. However, Brazil’s mixed economic system – that combined free-market capitalism with state-owned businesses – was scrutinised for enabling government corruption.

In 1994, the Plano Real was introduced to create a modernised Brazilian real, which was fixed at an exchange rate of 1 real to 1 US dollar and controlled by the Central Bank of Brazil. In 1999, the decision was made to float the exchange rate, which devalued the currency to a ratio of 2 real to 1 US dollar. Although the real was deteriorating, Brazil’s economy was still growing off the back of the development of other BRICS economies, which was increasing the demand for commodities.

Despite the global financial crisis in 2008, Brazil remained one of the world’s fastest growing economies in the world, with an average GDP growth of 5% per year between 2000 to 2012. However, this growth soon slowed, and the country entered a recession in mid-2014 as a result of falling commodity prices. The two-year economic slump resulted in over 1.5 million jobs being lost and growing discontentment with the government.

The future of the Brazilian economy

The growth of the Brazilian economy has never completely halted but the slow recovery of GDP has been a concern for traders and investors, and even caused the Brazilian real to fall to R$4 per US dollar in August 2018.

Although some analysts have given predictions that the real could fall even further against the US dollar, the Central Bank of Brazil and the treasury have continued to take steps to calm investors and reassure them that despite the rocky political climate in Brazil, there is no currency crisis.

When the International Monetary Fund (IMF) released its World Economic Outlook for 2018 and 2019, it renewed investor confidence in Brazil’s economic growth. The IMF predicted that Brazil’s economic outlook in 2018 would include 2.3% growth in GDP, with a further 2.5% growth in 2019.2

How to trade the Brazilian economy

By using financial derivatives, such as spread bets and CFDs, you can take a long or short position on a range of Brazilian assets including the Brazilian currency and the stock market. This means that you can trade Brazil’s economic downturns as well as periods of growth.

Trading the Brazilian currency

A popular way of gaining exposure to Brazil’s economy is through the currency, the Brazilian real (BRL). As forex is traded in pairs, the real is most commonly traded alongside the US dollar, in the USD/BRL pair. This shows how many BRL are needed to purchase a single unit of USD.

If you are optimistic about the future of the Brazilian economy and believe the real will increase relative to the US dollar, you would be bearish on the USD/BRL pair. If you are more concerned about the Brazilian economy’s growth, you would take the opposite view and buy USD/BRL with the expectation that it would increase in price.

Discover other emerging market currencies to watch

Trading the Brazilian stock market

The Brazilian stock market, ‘B3’, has almost 450 companies listed, and a market capitalisation of more than $771.08 billion. It dates back to 1890, at which time it was known as the São Paolo Stock Exchange or its abbreviation, ‘Bovespa’. It has since undergone two name changes: the first was in May 2008, when it was combined with the Brazilian Mercantile and Futures Exchange to become BM&FBOVESPA, and the second was in March 2017, when it merged with the CETIP to become B3. However, the exchange is still more commonly referred to as Bovespa.

Traders can get exposure to the Brazilian economy by speculating on the price of the benchmark index of the Brazilian stock exchange, the IBOVESPA, which tracks the performance of 60 of the most liquid stocks. The companies included on the Bovespa index cover about 80% of the total trades that take place on the exchange in terms of volume, and roughly 70% of the market capitalisation of the Brazilian stock market.

Alternatively, traders can take a position on the future price of individual stocks on the exchange. Some of the largest companies listed on the Bovespa, include finance companies, like Santander Brazil and Banco Bradesco, and manufacturing giants, like aerospace conglomerate Embraer or beverage brewing company Ambev.

Brazil is still experiencing growing pains, especially in relation to its political outlook and socioeconomic problems, which means that traders should exercise caution before opening a position on Brazilian assets. It is important to keep up to date with any news and announcements that can impact the Brazilian economy, and implement a suitable risk management strategy to protect yourself from any adverse market movements.

Visit our economic calendar to discover the dates for Brazilian macroeconomic data releases, like GDP and employment rates.

1 IMF, 2018
2 IMF, 2018

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