Brazil Is The Best Stock Market In The World Right Now
It’s just a week into 2019 and Brazil is the best stock market in the world. Parabens, Jair Bolsonaro. Until the army tanks roll in, as his opponents believed just four months ago, Brazil is on track to be the best-performing market this quarter, if not in the first half of 2019.
Based on the biggest, passive trades in the markets, the iShares MSCI Brazil is beating the SPDR S&P 500, Russia, India, China (duh), Mexico, FTSE Europe, Japan and the broader MSCI Emerging Markets Index.
Fitch Solutions forecast Brazil’s GDP growth to hit 2.4% this year, up from 1.3% last year.
Brazil’s economic recovery will pick up steam over the next couple of quarters, Fitch Solutions researchers wrote in a report published on Tuesday. They cited positive business sentiment bolstered by Bolsonaro’s new administration.
Most of the positive movement in policy and in the stock market is coming from the fact that the country is emerging from its holding pattern. Ever since Dilma Rousseff was impeached and later ousted in a Senate trial in August 2016, Brazil has been led by the reform-minded but highly unpopular Dilma vice president, Michel Temer. His approval rating never cracked 10%. He passed tons of reforms—spending caps, a new union labor law, Petrobras reforms—but none of that got Brazilian business going again.
With Temer gone and Bolsonaro’s early approval rating in the 60s, the overall mood in Brazil is not exactly euphoric but better described as a mix of sigh-of-relief and wait-and-see.
Fitch’s macro analysts don’t think Brazil is ready to grow like gangbusters all of a sudden. In fact, the previous estimate for 2019 GDP was 2.5%. They’ve lowered it because a Chinese economic slowdown means less Brazilian soy and iron ore going there this year.
An improvement in business sentiment tends to mean higher corporate investment. More corporate investment often translates into new hiring.
Brazil’s labor market added 755,537 jobs between January and November, pushing the unemployment rate down to 11.6%. That’s still high, but it is the lowest it’s been since July 2016.
Stable inflation means Brazilians also have more money in their pockets. Consumer sentiment ended the year at its highest level since 2013, which for Brazil was a Dilma-stimulus infused boom year.
The biggest headwind for Bolsonaro is pension reform. Public sector spending, most of it on public worker retirement, reduces the amount of money the government can put to work elsewhere—like infrastructure.
Unfortunately (and no surprise), Bolsonaro and his cabinet do not fully see eye-to-eye on pension reform. His economic team is led by well-known investor Paulo Guedes. Much of his base is military. The military has been one of the biggest beneficiaries of Brazil’s outdated pension plans. A lack of progress on that front will erode investor confidence, though most investors say they are waiting until the start of the second half before they rethink Brazil.
“He has grossly offended women, sexual minorities and afro-Brazilians and praised military government in Brazil and Chile,” wrote WSJ columnist Walter Russell Mead. “After 28 years of undisturbed service in Congress, Bolsonaro was dismissed as a marginal figure. It did not matter in 2018. An economic collapse, a national crime wave and the worst corruption scandal in Brazil’s history destroyed the public’s belief in the political establishment,” he says. Bolsonaro essentially clobbered the rival Workers’ Party candidate Fernando Haddad, garnering just over 55% of the vote. “Investors hope that ‘Trump of the Tropics’ will liberalize Brazil’s economy and reform its costly pension system. It is easier to mobilize public anger than to introduce effective reforms,” Mead wrote, adding that 2019 will be a challenging year for Brazil.
Bolsonaro’s off to a good start.
I’ve spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes.
My work has appeared in The Boston Globe, The Nation, Salon and U… MORE
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