Brazil outlook: Is the country going for gold?
Ilan Furman, Columbia Threadneedle Investments’ Emerging Markets Equities portfolio manager, examines the outlook for Brazil and discusses where he finds opportunities.
In January 2016, Brazil’s outlook was very gloomy. The country had been experiencing not only a recession but also a political paralysis, curbing the administration’s ability to implement measures to improve its fiscal position, damaging both business and consumer confidence. At this time, Brazil’s stock market reached a low point and credit default swaps peaked.
But this has recently changed, with former Vice-President Michel Temer installed as interim President, following the vote to impeach President Dilma Rousseff.
The new administration will allow crucial governmental decisions to be taken, credibility to be restored and will provide a much-needed boost to investment confidence (the final impeachment vote is scheduled for the end of August, after the Olympic games).
From a ‘top down’ perspective, there are several reasons to be optimistic.
The country’s base interest rate is very high by global standards at 14.25%. Inflation, after peaking in 2015, is now coming down, as pressure from rising regulated prices in 2015 fades and the ongoing recession lowers capacity-related pressures.
Therefore, there is significant scope to cut rates from current levels to 10% by the end of 2017. Furthermore, after two years of severe recession – with GDP contracting by 3.8% in 2015, and expected to contract a further 3.5% in 2016 – we are expecting a mild resumption of growth, with an expected 1% GDP growth for 2017.
The high quality of the government’s new economic team is already helping to boost Brazil’s policy credibility. Furthermore, we are seeing early signs of change in some of the state-owned companies. For example, Petrobras changed its management and is now working more consistently on asset sales and restoring its balance sheet.
The macro and corporate outlook remains challenging, however, but the ‘read-through’ from the current earnings season is reaching a bottom in several sectors; which would also mean reaching the bottom in terms of negative earnings revisions seen in the past few years.
It is important to note that the consumer is still in bad shape given expectations of rising unemployment and lack of consumer credit availability. Therefore, we expect that the recovery will be led by investments and industrial production.