Should you back Brazil’s Bolsonaro?

by , 2nd November 2018

Last week Brazil elected far right politician Jair Bolsonaro as its president. Market watchers likened the election to Trump’s 2016 win and despite the upset it has caused, markets and the Brazilian real have rallied.

Since Sunday’s vote the real has had an uptick rising nearly 2.2%. Prior to the election it had fallen nearly 14% from its five year high on 14th September.

In other markets Brazil’s leading stock market index, Ibovespa, has moved up 4.3% since Sunday, while bond yields have fallen.

The graph below shows the Ibovespa in purple, BRL in yellow and the 10 YR Brazil gov bond in black over the last month.

Source: Bloomberg

Bolsonaro is considered a market friendly right-wing leader. His budget plans include a reduction in state intervention in the economy, reforms on government waste to reduce and relocate unnecessary expenses, the privatisation of state-owned enterprises (such as Petrobras) and reforms to the pension system.

Leading the new government’s economic team will be Chicago-educated economist Paulo Guedes.

Morningstar reports that “Guedes’ pensions reforms, in particular, have the potential to be a game changer for Brazil’s long-term debt sustainability, says Delphine Arrighi, manager of the Merian Emerging Market Debt fund.”

Brazil has had a difficult year with uncertainty surrounding its elections and the nationwide truckers’ strike over diesel in May–June. The Ibovespa hit its lowest point for a year in June as a result of this.

Focus Economics cites Senior Economist Angela Bouzanis as saying that the “truckers strike caused widespread disruptions to the Brazilian economy, ultimately denting growth. The Central Bank’s economic activity indicator recorded the worst drop on record in May, industrial production plummeted at the fastest pace in nearly 10 years and exports of goods also plunged as the strike prevented goods from reaching the country’s ports. Moreover, inflation also spiked in June as goods shortages drove up prices. However, most of the effects of the strike were largely temporary and economic data for the more recent months has stabilized.”

The country also faces high public debt levels. Bouzanis adds that the high level of public debt is one of the key challenges facing the economy, and policymakers need to work on improving public finances to bring the fiscal deficit down.

However, it is not all bad. The Ibovespa has risen 130% since its lows in January 2016. The country holds a large chunk of international reserves which can help act as a buffer against economic turbulence. The current account deficit has also been contracting in recent years. Bouzanis explains that it is fully financed by strong inflows of foreign direct investment.

FocusEconomics panellists now see the economy growing 1.6% this year, down 0.1 percentage points from last month’s forecast. Next year, GDP is seen growing 2.5%.

CNBC also reports  Peter Boockvar, chief investment officer at Bleakley Advisory Group, as saying: “Now that Brazil has a new leader, the most important objective is now to get its country’s finances in line…Pension reform was the initiative that [current President Michel] Temer was not able to pull off and hopefully Bolsonaro can get a fighting chance to do so.”

If Brazil’s economy is set to get an overhaul then it could be a good time to jump in. Access to Brazil can now be done via an ETF, there are ten to choose from listed on the London Stock Exchange. The largest of these is the iShares MSCI Brazil UCITS ETF USD Dist, it has returned 23.14% over the last three years. While it is not the cheapest ETF on offer it is one of the oldest having been first offered in 2006.

ETF TER 3M RTN ASSETS EXTRA INFO
Lyxor Brazil Ibovespa UCITS ETF (USD)

RIOU

0.65% 9.24% €235m The ETF is incorporated in France.

It invests at least 75% of its assets in shares that compose the IBOVESPA Index

Lyxor Brazil Ibovespa UCITS ETF (GBP)

RIOL

0.65% 12.24% €235m The ETF is incorporated in France.

It invests at least 75% of its assets in shares that compose the IBOVESPA Index

HSBC MSCI BRAZIL UCITS ETF (GBP)

HBRL

 

0.60% 13.92% $34m The ETF aims to replicate the performance of the MSCI Brazil Index
HSBC MSCI BRAZIL UCITS ETF (USD)

HMBR

 

0.60% 10.79% $34m The ETF aims to replicate the performance of the MSCI Brazil Index
Xtrackers MSCI Brazil UCITS ETF (USD)

XMBD

0.45% (M’ment fee)

0.65% (Exp ratio)

9.42% $166m The ETF physically replicates the performance of the MSCI Total Return Net Brazil Index. The index provides exposure to large and mid cap equities, covering around 85% of the market.
Xtrackers MSCI Brazil UCITS ETF (GBP)

XMBR

0.45% (M’ment fee)

0.65% (Exp ratio)

12.47% $166m The ETF physically replicates the performance of the MSCI Total Return Net Brazil Index. The index provides exposure to large and mid cap equities, covering around 85% of the market.
iShares MSCI Brazil UCITS ETF USD Dist (USD)

IDBZ

0.74% 9.85% $413.9m The ETF aims to track the performance of the MSCI Brazil Index. The fund distributes income received to shareholders.
iShares MSCI Brazil UCITS ETF USD Dist (GBP)

IBZL

0.74% 12.5% $413.9m The ETF aims to track the performance of the MSCI Brazil Index. The fund distributes income received to shareholders.
AMUNDI MSCI BRAZIL (USD)

BRX

0.55% 9.58% $30m The ETF is incorporated in France. The Fund’s objective is to track as closely as possible the MSCI Brazil Index
iShares MSCI Brazil UCITS ETF USD Acc

CSBR

 

0.65% 9.01% $32.5m The investment objective of the Fund is to deliver the performance of the MSCI Brazil Index, less fees and expenses of the Fund.

 

 

ETF Issuers Featured in this Article