Why Brazil looks expensive compared to the BRIC nations

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Stock market prices in Brazil

Looking at the price-to-earnings (or P/E) multiple for Brazil over the last two years, equity shoppers may find that Brazil became a bit more expensive. Brazilian equities have been selling at 15–20x their earnings in the last two years. The valuations become clearer when we compare Brazil to its closest emerging market counterparts—Russia, India, and China.

BRIC PE valuations

Compared to the emerging markets

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The above chart compares Brazilian equity valuations with those of other emerging countries—like Russia, China, and India—over the last two years. Comparing the economies in the Brazil, Russia, India, and China (or BRIC) nations, Brazil is the more expensive or overvalued economy—compared to China and Russia.

However, part of the recent surge in Brazilian equities can be attributed to the four yearly elections in Brazil. This year the elections were in October. Markets surged partly on the expectations of a change in presidency from Dilma Rousseff—chief of the Worker’s Party—to Aécio Neves da Cunha—chief of Brazil’s Social Democracy Party. Brazil’s economic conditions hadn’t changed much. The conditions got worse during Rousseff’s first tenure as president—starting in 2011.

However, the polling booths saw a different outcome. Rousseff won a second term in Brazil on October 26.

Market reaction to the election results

Brazilian equities soared 5.3% since the first round of polls were held on October 5. The polls put Neves in second place with 34% of the votes—compared to Rousseff with 42% of the votes.

With Rouseff’s close victory against Neves in the final polls on October 26, markets reacted with an immediate sell-off spree. This drove down the stock markets in Brazil by 2.8%. In fact, since Rousseff took office back in January 2011, the stock markets fell by 27%.

The iShares MSCI Brazil Capped ETF (EWZ) invests in Brazilian equities like the oil giant Petroleo Brasileiro SA Petrobras (PBR) and the mining firm Vale SA (VALE). The performance of the EWZ gauges the Brazilian stock markets—much like the WisdomTree India Earnings Fund (EPI) for India and the VanEck Vectors Russia ETF (RSX) for Russia.

Rousseff faces a troubled economy

With her re-election as the President of Brazil, Dilma Rousseff faces a stagnant economy and a growing budget deficit. She wants to reassure the country’s would-be investors that there will be growth and better prospects.

Brazil has economic issues that need to be addressed immediately. If the issues remain, the economy could fall back into recession or experience a ratings downgrade.

In the next part of the series, we’ll discuss the key economic issues that are currently affecting Brazil’s growth.

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