Brazil has struggled in the past years, bogged down by unfavorable economic conditions including a collapse in growth. A recovery would hinge upon some much needed structural reforms.
Five years ago investors could not get enough of Brazil. Today, many have written off the country following several years of poor performance, decelerating growth and chronically high inflation. If Brazil is to reclaim its place as an investment destination, its equity market will either need to get cheaper, or a more obvious catalyst—preferably a pro-reform agenda—will have to emerge.
Market Realist – Brazilian stocks are not cheap despite their low price-to-earnings ratios.
The graph above compares the price-to-earnings (or PE) ratios for Brazilian stocks (EWZ) as tracked by the Bovespa Index of São Paulo with the PE ratios of emerging market stocks, tracked by the MSCI Emerging Market Index (EEM), the S&P 500 Index (SPY)(IVV), and the MSCI EAFE Index (EFA). EFA tracks stocks from developed markets other than the US and Canada.
Brazilian stocks’ PE ratios currently stand at 14.5x, 12.5x, 19.9x, and 17.8x, respectively. While Brazilian stocks are cheaper than the S&P 500 and other developed markets, there’s a good reason why.
Low commodity prices, high inflation, low growth, and a weak currency make Brazilian stocks unattractive. We’ll discuss each of these factors in this series.
President Dilma Rousseff has to push through key reforms in order to get the economy on track. Some of the key issues in Brazil include massive red tape, supply bottlenecks, and a burdensome social security system.
Other emerging markets are actually cheaper than Brazil. However, those markets with a high dependence on commodities, including Russia (RSX), also suffer from a similar plight.