Brazil Elections: Investors Can Forget About This Emerging Market (EWZ)

The Brazil elections were a disaster with a pretty simple takeaway: Investors in emerging markets can give up on the South American giant for the next four years.


That’s how long it will be before the next Brazil elections, with the nation and economy continuing to fall apart the whole time.

The Brazil elections were never going to be a magic fix for this basket-case of an economy even if challenger Aécio Neves pulled out a win. But now that incumbent Dilma Rousseff has won another term in the tightest election in Brazil’s history … well, you can expect more pain. After all, her policies for Brazil’s serious macroeconomic challenges have done nothing but make serious problems much worse.

Tight labor markets, an economy flirting with contraction, rocketing inflation, declining corporate profits and political interference and corruption are the defining characteristics of the once-mighty Brazilian economy, and Rousseff has had no success in combating any of it. If anything, her policies have made matters worse.

And now the country is doomed to another four years of deterioration, with high inflation and low growth the order of day. Just look at the reactions of the equity and currency markets. Brazil’s main stock-market gauge — the Bovespa — cratered in wake of the election news, losing more than 6% soon after it opened Monday. At the same time, the Brazilian real tumbled against the dollar.

Brazil Elections Doom Markets

The market, clearly disappointed in the outcome of the Brazil elections, is going to remain sour for a long time unless something big changes. Sure, oil and other commodity prices could stage an epic comeback or the Rousseff administration could raise rates to get inflation under control. But those are highly unlikely scenarios.

The safe bet is we get more of the same out of Brazilian stocks, which have been complete losers over the last four years. Just have a look at the chart embedded on the right, courtesy of Yahoo Finance.

Click to Enlarge
Source: Yahoo Finance

The Bovespa fell more than 30% over Rousseff’s last term. More importantly to U.S. investors, the big Brazil exchange-traded fund — the iShares MSCI Brazil Index (EWZ) — is down almost 50%. The U.S stock-market benchmark S&P 500 is up more than 60% over the same time.

Among Brazil’s biggest problems is that it’s too dependent on China to drive prices for its commodity exports. When China hit the brakes on its own red-hot growth, it exposed the weakness of Brazil’s consumption-led expansion. Brazilian consumers who drove much of the recent growth — thanks to a huge expansion in consumer credit — are tapped out. Compounding matters is that rampant inflation makes interest rates go up when consumers are already carrying too much debt.

The government hasn’t done much better with its books, borrowing money but failing to invest in productive assets like infrastructure. Indeed, Standard & Poors downgraded Brazil’s credit rating to one level above junk.

Some market watchers say Brazil is so cheap it’s a buy, but that’s just wishful thinking. Rousseff can’t change anything without alienating the voters who gave her another term as president.

Sadly, for Brazilians and investors in Brazil, things are going to get worse before they get better.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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