After an era of 16 years of elections won by the left party (PT), Brazil has finally elected a president with a reformist and liberal economic agenda. Bolsonaro and his team have listed social security reform as one of the priorities of the new government, in order to solve the country’s serious fiscal problems. Yet, economic fundamentals have improved significantly since 2016. Inflation is at the lowest level since 1998, while the interest rate is also at historical lows. The country now has a current account deficit of less than 1% of GDP.
On top of that, Brazil has one of the most liquid, developed and well-regulated financial markets of the emerging world. The election of this new pro-market government and the economic recovery are important catalysts, which should attract new inflows to local markets, in our view, especially to equities. There are more than 20 IPOs already pre-announced for the next nine months. Global equity funds are underweight in Brazilian equities and, more significantly, allocation to equities from local investors are below historical standards.
After two years of severe recession, we believe Brazil now has all the ingredients to grow. Its GDP is 6% below pre-crisis level and 20% below pre-crisis trend. Looking further, we expect inflows to pick up in local risky assets as investors regain confidence in Brazil’s recovery.
ARX Investimentos, a BNY Mellon company