Brazil’s PMI shows expansion, though inflation poses threat
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Purchasing Manager’s Indices (PMIs) are widely used leading indicators to gauge the performance of a sector in an economy. The indices are based on surveys of business managers and are usually composed of questions with relative answers. For example, a typical key question may be “Comparing against last month, is the level of business activity higher, lower or the same?”. By aggregating a large number of responses, the overall sentiment towards the sector can be quantified.
The HSBC PMIs are a series of PMI indices focused on emerging markets, compiled by HSBC and Markit. As with most indices of this type, the scale ranges from 0 to 100, with any value below 50 meaning contraction and above 50, indicating expansion. Most of HSBC PMIs focus on the manufacturing sector, though HSBC has developed both manufacturing and services sector PMIs for the BRIC countries (Brazil, Russia, India and China).
In the case of Brazil, the December values for the manufacturing PMI show a slightly lower value than in November, but still remains in expansion territory. In fact, the output of the manufacturing sector increased for the fourth consecutive month in December. New order volume increased, at a reduced pace, and new export orders posted the first increase in 21 months. The data indicates that the Brazilian manufacturing sector is indeed expanding, though perhaps not as fast as in previous months.
Inflation showed a troubling trend; both input and output prices increased, though the rate of inflation for inputs was higher and at an 18-month high. Inflation is usually a byproduct of fast growth and higher inflation may trigger higher rates by the Brazilian Central Bank to curve inflation and slow down growth. Additionally, if costs continue to rise faster than consumer prices, margins will get squeezed and corporate earnings will fall along with Brazilian equities.
Investors in iShares MSCI Brazil Index (EWZ) or other small cap versions, such as those by iShares (EWZS) and VanEck Vectors (BRF), should watch the PMIs closely to understand whether or not Brazil will once again return to strong growth or continue to be outpaced by its Latin American neighbors. This is also important for investors in Latam ETFs, which are generally heavy on Brazilian exposure, e.g. iShares Latin America 40 Index Fund (ILF) and SPDR S&P Emerging Latin America ETF (GML). The data so far implies that Brazil is definitely growing, though perhaps not accelerating, and inflation may throw a wrench in its growth engine. It will be important to complement the view of this manufacturing PMI with the services PMI to get a more complete view of the economic health of Brazil.