Analyzing Brazil’s Turnaround: Is It Here to Stay?

Jared Dillian's Key Insights on Recent Market Trends

(Continued from Prior Part)

Is Brazil really making a U-turn?

Since the start of the year, investors have been worried about global (ACWI) (VTI) (VEU) economic growth, deflationary pressure on the world economy, and China’s (FXI) (ASHR) (YINN) economic slowdown. Meanwhile, Brazil has outperformed the world. The iShares MSCI Brazil Capped ETF (EWZ) tracks the performance of Brazil, which has risen 61% from its low of $17.33 on January 21, as of April 25. It has outperformed all major country- and region-specific ETFs including those of the United States (SPY), Europe (FEZ) (EZU), and Japan (EWJ).

What is Brazil’s economic growth signaling?

The Brazilian economy has largely been in a downward trend since June 2014, as commodity (DBC) prices started their downturn in mid-2014. The country’s economy greatly depends on the movement of commodities. According to Jared Dillian of Mauldin Economics, only the reversal in commodity prices can drive Brazilian equities. The Brazilian metal mining company Vale (VALE) was going bankrupt and was trading at $2 per share a few months ago. However, it has recovered and even broke $6 on April 20, 2016.

There are a series of problems that Brazil has yet to resolve such as spiraling unemployment, high inflation, political turmoil, stagnant economic growth, a high fiscal deficit, a deep recession, and downgrades from rating agencies. The Brazilian economy is experiencing high inflation of 10.4%, despite the central bank’s interest rate hike.

Is Brazil’s U-turn here to stay?

Recently, Brazil’s main problem is corruption. Most of its public organizations are under corruption charges and are inefficient in delivering their work. A stable government with a clear economic vision could minimize risk in the economy.

These are the important factors that can drive real economic growth in the country, despite the rise in commodity prices. If the above changes don’t happen, then Brazil’s performance may reverse its trend. For more on this topic, read Potential Outcomes for the Geopolitical Situation in Brazil.

In the next part of this series, we’ll look at what Jared Dillian thinks of the pound ahead of the British referendum.

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Browse this series on Market Realist:

• Part 1 - Jared Dillian Explains Why Deflationary Pressure Has Changed

• Part 2 - Is the Real Market More like January’s or April’s Market?

• Part 3 - Why Investing in Canada Requires Intellectual Flexibility