After Rough Start, Downgrade, Brazil Now Beats Benchmark

Apr 2 2014, 3:56pm CDT | by

It was a tough start to 2014 for Brazil, but a recent sovereign credit downgrade and rising interest rates have not put a damper on the nation’s stock market. And thanks to Wednesday’s nice 2.4% bounce, Brazil is the second best BRIC behind India and is firmly ahead of the MSCI Emerging Markets Index.

Either investors are building positions for a stronger second half, or they are in for a rude awakening.

The iShares MSCI Brazil (EWZ) exchange traded fund started the year on par with Russia as the two worst BRIC markets, both down 10.35% in January.  Year-to-date ending April 2 has EWZ up 3.5% while the MSCI Emerging Markets Index is down 0.54%.

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Judging by Wednesday’s industrial production data, a softer growth trend appears to be in the works.

IP growth for February slowed to 0.4% from January, following an upwardly revised print of 3.8% in January. With today’s report, the level of industrial production has finally recovered from the strong December drop. In year over year terms, the IP index expanded by 5.0%, slightly above consensus estimates and up from a 2.9% contraction in January. So far, IP in Brazil has improved 1.5% year-to-date.

All industrial categories slowed in February. The intermediate goods production sector rose by 0.8%, down from 1.6% in January. There was also a sharp slowdown of capital goods production to 0.1% from an impressive 13.3% growth in January and 13.3% growth in December.

Domestic demand is slowing, Barclays Capital analysts led by Marcelo Salomon in New York said today. Despite the stronger-than-expected fixed investment data from the fourth quarter, Salomon said he remains “very skeptical” the year-ending investment push by companies will spill over into 2014.

The overall growth outlook remains soft.

“Today’s IP report confirms that the robust January print was only a rebound from the strong drop in December, rather than the beginning of a solid growth trend,” Salomon said.

Moreover, the Central Bank is expected to raise the Selic by another 25 basis points to 11%.  The market is expecting this.  All eyes will be on the wording of the monetary policy committee’s meeting minutes for clues as to whether this ends the current tightening cycle that began in April 2013. Given a recent resurgence in food prices due to the worst summer drought in 50 years, the Economist Intelligence Unit said today that there was a “high probability” for interest rates to go higher in the months ahead.


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