I wondered who followed my 2008 predictions and bought on the Bovespa and especially went into Rio Vale Doce and Petrobras. Ratings agency Standard & Poor's upgraded Brazil to investment grade two weeks ago, and Bovespa shares promptly surged thanks to the earlier-than-expected bump. The iShares MSCI Brazil Index, an exchange-traded fund that tracks Brazil's Bovespa index, rallied 8 percent on the day of the announcement and continues to climb this week. Petrobras profit for the last trimester was up 68% totaling a profit of already 6,9 billion R$ for this year.
Slowly and without great fanfare (the Belgian news rarely mentions Brazil at all), Brazil's economy has turned a big corner. Already a global power in agriculture and natural resources, Brazil has added a key ingredient that had long eluded it: a currency with staying power. In turn, that's helping unleash the greatest burst of prosperity the country has witnessed in three decades.
Gross domestic product grew 5.7 percent last year, up from 3.7 percent in 2006, and public debt as a percentage of GDP has been shrinking for five years. Brazilian stocks jumped 70 percent in the past year, while other hot emerging markets like China and India watched equities slump mightily. The Bovespa index is now at 70.000 and I see it further rising to 74.000 end of this year.
Risks remain however. The S&P upgrade will mean the real will even go higher. I'll sum up my expectation for the economies indicators in a next article, but as to the exchange rate, I expect the Real to end at 1,72 by end of 2008 and 1,8 by the end of 2009. Make your own bets how the dollar will behave against the Euro by the end of 2009...
The big question is however how Brazil could derail at the end of the commodity boom and a return to health for the US economy.
First, I don't believe the US is close to a recovery. The US (and many other parts in the world) are in for a huge real estate deflation, like the article in the Economsit states: the housing price-bust has a long way to go.
Secondly, some people claim commodity prices will come down sharply when the US economy starts to recover. This is utopic, commodities will not get back to their pre-2004 levels. At most the growth rythm will be lower or flattened. True, this could impact somewhat the speculations on Brazilian shares, it would however not impact the Brazilian economy. People tend to overestimate the importance of export for Brazil. Brazil is not Belgium, only 15% of the Brazilian GDP is composed of export. Also, analysis of past S&P upgrades shows that shares often fall following an investment-grade bump. Other nations like Mexico and Russia saw declines in the months following their upgrades. Still, Brazil's boost came earlier than expected, and that could help minimize some of the post-party hangover.
What worries me personally most is the exchange rate. FX is a beast, the Yuan is still seriously overvaluated and already since early 2006 I have the fear the Real is a bit overevaluated. My guts proved wrong. The Brazilian central bank has managed for more than 2 years to keep its currency neatly stable. Usually by intervening and buying up dollars (Brazil has now huge dollar reserves and even becaming a net creditor on it's balance sheets, this in sharp contrast to eg. South Africa).
And to keep the growth afloat the senate now has voted a plan to massively stimulate exports through subsidies in various sectors. More than 20 billion dollar will go into these subsidies. I agree with Miriam Leitao however (I'm her biggest fan) that this sector-oriented approach entails some dangers and that a general policy would be more beneficial to the country.