Like most confidence surveys, the indices are constructed by polling a large number of managers in the sector. The questions included ask how a particular item (business activity, new business, etc.) has changed since the previous month and have three possible answers: better, worse, same. All the responses are aggregated into an index from which the overall sentiment for the sector can be quantified. The scale ranges from 0 to 100, with any value below 50 meaning contraction and above 50 meaning expansion.
The Brazilian Manufacturing PMI came out earlier this month, showing a slight decrease and troubling signs of inflation. The Services PMI just came out and paints a slightly better picture. Business activity (i.e. output) and new business levels were higher, reflecting growth in the sector and completing the fourth month of increases in new business. Backlogs showed a reduction for the second month in a row, in line with the increase in staffing levels, though the job creation rate was slower than in November. As with the manufacturing PMI, both input and output prices increased, with payrolls climbing faster than the prices charged. If this uneven inflation is sustained, it will lead to margin squeezes and lower profitability. Finally, while there was an optimistic outlook for the next 12 months, the level of confidence was at a 3 month low.
Overall the new data shows steady yet slow growth, slightly better than the manufacturing PMI data. The inflation problem also came up, which adds to the probability of the central bank raising rates to curve inflation. Such an action would curve the meager growth currently observed and the equities market would fall accordingly.
Investors in iShares MSCI Brazil Index (EWZ) or other small cap versions, as those by iShares (EWZS) and Market Vectors (BRF), should understand how both the manufacturing and services PMI complement each other to paint a more complete picture of the Brazilian economic outlook. Investors in Latam ETFs, which generally have Brazilian exposures of approximately 50%, should also pay close attention to these indicators. Such Latam ETFs include but are not limited to the iShares Latin America 40 Index Fund (ILF) and SPDR S&P Emerging Latin America ETF (GML).
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