Global investors once embraced a fast-growing Brazil with open arms. But as the Brazilian economy runs into serious headwinds, they have started to treat the one-time darling of the emerging world as if it has overstayed its welcome at the guest cottage.
“It had to happen sooner or later. After a decade of ‘the future is finally here’ in Brazil, we’re seeing a wave of creeping pessimism,” global risk expert Ian Bremmer of Eurasia Group said in a note to clients last week.
In effect, it’s the last nail in the coffin for the BRICs as an investment theme, which should have been buried long ago anyway. The idea of lumping together the largest emerging countries made for a catchy marketing ploy. But it never made much sense, given their widely different economies, prospects, institutional issues and political structures, as more than a few observers of the developing world have long pointed out. Russia is all about oil, gas and oligarchic muscle; India is still more a swamp than lush paradise for foreign money; and Brazil, in the view of one critic, “is the un-China, with interest rates that are too high and a currency that is too expensive.”
In the immortal words of Société Générale strategist Albert Edwards, BRIC ought to stand for “Bloody Ridiculous Investment Concept.”
But let’s get back to Brazil, the world’s sixth-largest economy and often lauded as one of the emerging world’s most likely candidates to join the industrial elite, a dubious honour these days.
Recent surveys show that global fund managers are cutting back their exposure. Last week alone, equity players yanked $245-million (U.S.) out of Brazilian funds, the largest outflow since last August. The exit obviously stems in part from worries about the impact of a slowdown in China, a key market for Brazilian resources, as well as the spillover effects of the euro zone’s deepening slump. But Brazil’s own structural weaknesses, a faltering economy and rising concerns about government protectionism also play into the shifting mood.
The Brazilian economy hit a wall last year, weighed down by, among other things, sky-high borrowing costs, a ridiculously overpriced currency, uncompetitive business taxes and infrastructure woes. Transportation, especially, is a nightmare. Now, as economists cut growth forecasts sharply, the government has gone into stimulus mode. It is easing reserve requirements for banks and leaning heavily on them to reduce exorbitant loan charges. And the central bank is slashing interest rates. A reduction of 3.5 percentage points since last August has lowered the benchmark rate to 9 per cent, with another half-point cut expected this week.
But Mr. Bremmer notes that the main problem is that “investors underappreciated how much Brazil remains an emerging market during a period of high growth and lower global volatility.” He insists that their concerns now are overstated, that the economy still has a lot going for it, and President Dilma Rouseff has shown herself to be fairly pragmatic and willing to tackle structural reform.
He is not alone in his refusal to jump on the Brazil-bashing bandwagon.
“What’s been going on in Brazil and elsewhere in the emerging world is not new news,” says Henry McVey, global head of macro and asset allocation with private-equity heavyweight KKR, which tends to take a longer-term view of markets and their prospects.
In response to the Great Recession of 2008-09, Brazilian and other policy makers in the emerging world adopted aggressive stimulus measures. While China poured billions into infrastructure, Brazil and a handful of other countries stoked domestic consumption. But the emerging economies proved more resilient than expected. And today governments are dealing with the consequences of their intervention.
“The [investment]story is still very compelling, but there is definitely a macro headwind in these countries that wasn’t as prevalent … during the early 2000s,” Mr. McVey says.
“Looking at the big picture, our target asset allocation continues to favour overweight positions across all emerging markets, including Brazil and its Latin American counterparts,” he writes in an assessment of the Brazilian market that highlights its strengths, including favourable demographics (half the population is 30 or younger) and a rising standard of living, but doesn’t sugarcoat its significant hurdles.
The key for investors is to ensure they are pursuing the right investment themes, he says, citing the ongoing deleveraging in the developed world and the rise of consumption in the emerging markets as the underpinnings for a sensible long-term strategy.
“My view is that there’s an unequivocal shift from the developed market consumer to the emerging market consumer. And there are a lot of different ways to play that.” These could include direct investments in the most promising market segments or buying into exporters in the developed countries that cater to those consumers.
Over the next five years, well above 60 per cent of incremental global growth will stem from emerging markets. “Brazil will participate in that growth. How you make money from that is going to change by investment cycle, presidential cycle, different things like that. But we don’t think that structural framework is up for debate.”