Is investing in Brazil a good idea?

Is investing in Brazil a good idea?

Brazil stock market and the future:

Praia de Copacabana no Rio de Janeiro, Brasil (Copacabana Beach at Rio de Janeiro, Brazil)

In the first quarter of 2022, despite a temporary setback in mid-March, the BOVESPA index of Brazil’s stock market showed an obvious upward trend as a whole.

Although factors such as the interest increase by the Federal Reserve, the escalation of conflict between Russia and Ukraine, the outbreak of Omicron virus and the high global inflation caused setback of stock markets in major economies, the BOVESPA index of Brazil’s stock market rose by about 15% in the first quarter of 2022. 

The main reason is that commodity exporting countries including Brazil have ushered in foreign capital inflows due to improved economic prospects. From January to February 2022, the cumulative capital inflow of the portfolio of Latin American emerging economies reached $14.9 billion USD.

Emerging Markets Forecast with Mirae Global Senior Portfolio Manager Malcolm Dorson
After the rise in the first quarter, however, there was a significant setback in Brazil’s stock market in April. The main reasons are as follows:
  1. To control the inflation rate explosion, Brazil continued to raise interest rates. Since raising interest rates slows down or even suppresses market speculation. (Such as in real estate, stock, and foreign exchange markets, etc.), the stock market in Brazil declined.
  2. Strike caused by the rise of interest rates. Due to the Brazilian government’s refusal to raise the salary of employees at the Central Bank of Brazil by 26%. Starting from April 1st, all employees at the Central Bank of Brazil went on strike. Which delayed the release of many key economic data and monetary policies in Brazil. Due to the lack of market data and information for several weeks, the market became increasingly confused.
  3. Epidemic situation: according to the data released by the Brazilian Ministry of health on April 27th. 20943 new confirmed cases of COVID-19 were added in Brazil on that day, with a total of 30399004 confirmed cases; there were 245 new deaths, totally 663111 deaths. The epidemic affected the normal operation of industries.
  4. Presidential election of 2022. This year is Brazil’s election year, and the unknown future policies form a potential risk to Brazil’s stock market.
For the future trends of the Brazilian stock market, there could be a period of setbacks or fluctuations. 

The conflict between Russia and Ukraine, the COVID-19 situation and the high inflation rate. Will have a negative impact on the economic development of Brazil this year, thus negatively affecting its stock market. 

In addition, the Brazilian economy may experience stagflation this year which will be reflected by the stock market. Moreover, the rise of interest rate, inflation and the conflict between Russia and Ukraine. As a result, have led to a large increase in Brazilian government bond yields. Government bonds will be more attractive to investors, which will reduce investments in high-risk businesses such as stocks. This will have a certain negative impact on the stock market.

However, the market is cheap and has been steadily sold down for years! The BOVESPA still trades at ⅓ of the pre 2008 financial crisis value. So there could be value yet?

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Is investing in Brazil a good idea? Written by Yining Duan