Areas That Can Mitigate Brazil’s Commodity Price Losses
Brazil’s past performance
In the past, Brazil’s (EWZ) performance was mainly supported by the movement in commodity prices (DBC) (DBA). As its economy is greatly dependent on the commodity exports, any fluctuations in commodity prices affects the economic growth of the country.
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During the 2008 subprime economic crisis, Brazil’s equity index fell by nearly ~55.3%, and its commodity index fell by nearly 42%. Other non-commodity sectors such as the financial and IT sectors also showed a fall in performance. However, Brazil’s equity index was not able to provide strong performance when the non-commodity sectors recovered after the crisis.
In June 2014, when commodity prices started their downturn, Brazil’s IT sector showed strong performance at that time. Brazil’s IT index rose by nearly 110% in June 2014 from its low in July 2009. However, there was not any massive improvement in Brazil’s equity index.
Brazil’s financial services
Brazil’s financial services industry closely tracks the movement of its currency and the Selic rate (short-term interest rate). The fluctuation in its interest rate and depreciation in its currency directly impacts the performance of its financial services sector.
Major Brazilian banks such as Banco Bradesco (BBD), Banco Santander Brasil (BSBR), and Itau Unibanco (ITUB) also showed a huge fluctuation due to the change in the Selic rate and the depreciation of the real. However, the depreciating real is good for the country’s IT sector.
From the above chart, we can see that the financial sector provides support to the movement of Brazil’s equity market. The financial and IT sectors provide support to Brazil’s equity market, which is touching new highs despite the fall in commodity prices.
In the final part of this series, we will analyze what could drive growth in the economy.