Why Brazil’s equity market keeps dropping (Part 2)

Brazilian Equity Market 2013-07-07Enlarge GraphContinued from Why Brazil’s equity market keeps dropping (Part 1)

Recent social unrest came at a bad time, when the market was a falling knife

Starting early June, several riots emerged across the country in response to proposed bus fare hikes. Initially started in São Paulo to protest the fare hike  from R$3.00 to R$3.20, the riots quickly spread to several cities across Brazil. The original hike was planned to be higher, but the government exempted the bus fares from certain taxes, though the exemption wasn’t enough to avoid the fare hike.

Part of the unrest relates to the hikes coming when the country’s spending over R$7 billion on the FIFA 2013 Confederations Cup and the 2014 World Cup. The total cost of these initiatives is estimated at over R$30 billion, which is three times the amount spent in South Africa. Currently, several stadiums are still pending construction.

The protests in Rio de Janeiro on June 17 and 18 invaded the State’s Legislative Chamber, and the riot police came in. After meeting with police violence, the protests gathered followers and significant negative press. As the protests continued, other issues and demands added to the cause, including movements concerning police brutality, gay rights, petroleum royalties, education, fiscal responsibility, and corruption.

On June 24, President Dilma Rousseff appeared on national television, agreeing to take measures to improve funds management, public transport, healthcare, and education. Nonetheless, protests continued on June 26 during the semifinal match of the Confederations Cup between Brazil and Uruguay. Then, during the final match between Brazil and Spain on June 30, more than 5,000 protesters assembled and confronted the police.

President Rousseff’s overall approval rating has dropped to 30%, down from 57% according to Datafolha, a leading Brazilian research company. The survey also revealed that 80% of respondents support the protests. Protests have now reached 100 cities.

The protests naturally increase the political risk priced into the stock market at a time when several other factors are contributing to reduced investment flows to emerging markets, making Brazil much less attractive than other emerging markets and countries in the region (such as Mexico, Chile, and Colombia).

Read on to explore the other factors weighing down the market in Why Brazil’s equity market keeps dropping (Part 3).