It seems that in the case of Brazil (EWZ), many stars are aligning, but for the wrong outcome. Lately several investors have been raving that the BRL will strengthen, but before jumping on the bandwagon, it’s worth reviewing the fundamentals. A strong currency and mediocre market won’t give investors expected returns.
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There are many macroeconomic indicators that are just not in the right place to even imply a bounce in the near term. The recent industrial production figures failed to surpass the already depressed Wall Street expectations. The September PMI was welcomed by investors, but the value was flattish. Looking into the details reveals trends in the wrong direction.
Plus, trends in the consumer goods sector point towards slowed private consumption at the same time that lower business confidence points towards a reduction in the capital goods sector.
The strong depreciation of the real has caused a sharp increase in imports, raising costs for manufacturers and preventing them from pricing competitively to gain international business from other rivals whose costs are lower.
To compound matters, the government has taken a hawkish stance at interest rates, focused on squashing inflation while growth remains sluggish. The Central Bank has lowered the GDP forecast but still seems to have a misguided optimistic outlook on the economy.
But before discussing these negative points in detail, let’s first tear down the usual flawed argument of why Brazil (EWZ) is a good investment over a year horizon. Read on.