Commentary - Is Brazilian stock market as hot as Gisele Bundchen?

The Brazilian stock market has been volatile lately, I mean in the past week. The reason is entirely sentiment-driven. A well-regarded finance minister, Antonio Palocci resigned because of bribery scandal. His replacement, Guido Mantega is not considered a credible inflation fighter. Moreover, with the presidential election looming in 6 months, there is fear that the Lula administration will pursue expansionary fiscal policy. Is this a valid reason for investors to worry about? No, not in my view. Let me explain.

Like all emerging markets, the Brazilian market has been hot, indeed very hot. Bovespa is up 13% YTD compared to 12% for MSCI EMEA and 5% for S&P500. The Brazilian ETF, EWZ had similar run (see the chart). For those who have taken the ride, I’d say stay on, you ain’t seen nothing. For those on the sideline, it’s time to jump on the bandwagon. Here is a simple reason.

Brazil has one of the highest interest rates in the world. The benchmark rate, called Selic has come down around 400 basis points from August last year but remains at 16.5%. This rate would have been justifiable had there been inflation but there is none. 12 month inflation is around 4% and the market expects it to remain there for the next 12 months. On the backdrop of this week’s events, President Lula has re-committed himself to fighting inflation . There is no need to doubt his words. Compare the Brazilian experience to it neighboring Argentina where the benchmark rate is 11% and inflation is also 11%. The timing also looks good, EWZ has hit the 50-day moving average (see the chart), a good entry point, I think.

I’d say the Brazilian stock market is not only as good as but better than Gisele Bundchen – it has the future Gisele doesn’t, especially after she broke up with Leonardo DiCaprio.



Important Dates for Brazilian Investors
April 17 - Central bank decision on interest rate.
July 5 - Candidates register for the election.
July 19 - Central bank decision on interest rate.
August 30 - Central bank decision on interest rate.
September 30 - Election for President, Governors and Congressmen.
October 18 - Central bank decision on interest rate.
October 28 - 2nd round of election.
November 29 - Central bank decision on interest rate.