By Peter Goodall | June 12, 2018
Global markets rallied last week with the S&P gaining 1.62% while the MSCI World index rallied 1.39%. This week we will be looking at the worlds’ 9th largest economy: Brazil.
In 2015, a fall in commodities prices and political crisis caused Brazil to slip into its worst recession in recorded history. President Dilma Rousseff was impeached on corruption charges following revelations that she was responsible for illegally manipulating government accounts and other corruption charges. Her vice president, Michel Temer, has assumed power. To say he is deeply unpopular would be an understatement as one survey showed him polling at a 3% approval rating. This has not been helped by a recent trucker strike in which they are blocking roads in protest. Schools have been closing their doors as teachers cannot get to work. President Temer has since authorized the military to remove the trucks.
To be fair, some of the challenges are out of his control. The recession was originally precipitated by a decline in demand out of China, Brazils’ largest trading partner. It’s worth noting that the next largest trading partners are the US and Argentina. While China has since recovered, Argentina is now facing its own troubles.
Brazilians are feeling the pain of the recession at home. The IMF is showing the unemployment rate at 13% as of 03/31/2018. It is worth noting that this figure appears to be cyclical, spiking relatively consistently in March each year. The Brazilian Real also devalued, causing the cost of imported goods to rise.
Signs of a recovery are in the works. Unemployment has been dropping. Brazil appears to be a beneficiary of the US-China trade spat. The US-Mexico trade dispute resulted in Mexican buyers boosting purchases of corn from Brazil after Trump threatened to tear up the North American Free Trade Agreement. When China levied tariffs on US sorghum, Brazilian sorghum exports rose. On Friday, the Brazilian Real rallied strongly against the dollar on signs of increased inflation.
The recent reversal in the unemployment trend could be cause for optimism, and the October elections may present the opportunity for a turnaround in the economy or an improvement in sentiment. Brazil poses unique risks but we believe there are opportunities for strategic stock selection. We continue to look for value at a reasonable price both domestically and abroad.