Economy

Brazil Stocks Down Again After Pre-FIFA Boom

Following a nice little run, Brazil’s stock market is now underperforming the MSCI Emerging Markets Index since the start of the FIFA World Cup on June 12.

Forbes
01/07/2014 18:18
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Following a nice little run, Brazil’s stock market is now underperforming the MSCI Emerging Markets Index since the start of the FIFA World Cup on June 12.

 

Maybe it’s a little bit of selling on the good news, or concerns that economists keep lowering Brazil’s GDP forecast to less than 2%, but Brazilian equities are no longer in the green.

 

The iShares MSCI Brazil (EWZ) exchange traded fund is down 3.92% since Jan. 2, while the MSCI Emerging Markets Index is down 1.3%.

 

Brazilian equities have been second only to India — this year’s emerging markets darling thanks to the election of Narendra Modi and new Central Banker Raghuram Rajan. The iShares Brazil ETF rose 10.4% from the start of the year til the start of the World Cup. It is now up 6.94%, still beating the MSCI Emerging Markets Index. So there was a mini-FIFA bounce after all, at least for some Brazilian stocks listed on the NYSE.

 

Economic fundamentals have not been driving the stock market.

 

The government said this week that economic weakness means it will extend tax breaks for auto manufacturers, who have seen car sales slipping 8% this year as of the end of June. Auto production declined by 14.5% between January and May, according to the Brazilian automotive trade group Anfavea.

 

While investors have no way of really playing Brazil’s auto market — the automakers are all German, Italian and American and their stock movement does not depend on Brazilian sales — the consumer story has not helped equities there.

 

Even Ambev, which I have picked on a few times here, continues to disappoint. The beermaker is down 1.4% since the start of the World Cup and down 4.2% year-to-date even with beer sales on the rise.

 

Other consumer names have not impressed much either since the World Cup kick off in Sao Paulo last month.

 

The ADRs for Pao de Acucar Group (CBD), owners of Brazil’s biggest supermarket chains, is down 4.45%. In the local market, Localiza rental car company is down by 3.09%. Both are up year-to-date however, with Localiza beating the market at a near 12.5% gain year to date.

 

It is hard to find a true Brazilian bull. But despite weaker economic data and an election coming down the pike later this year, it is also hard to find true bears.

 

“I think the consumption didn’t come as too much of a surprise because you have several factors at play, one being the fact that consumers are getting a bit stretched,” says Nicholas Jaquier, an emerging markets economist for Standard Life Investments in the U.K. It has been a standard government policy in Brazil over the last five to seven years to boost consumer lending, especially in auto and home loans.

 

“If you look at debt service and debt to income in Brazil they are pretty high, especially for a country that does not have high incomes,” Jaquier says. “There is simply not a lot to add to the credit impulse there. Plus the central bank has been increasing interest rates for the past two years, increasing the cost of that debt burden.”

 

FIFA is in town until July 13, when investors will then turn their focus on the presidential election in October.

 

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