Why Brazilian Stocks Have Underperformed Lately



A cursory look at a chart of the Brazilian stock market (EWZ) would justify the use of the term ‘roller coaster ride’. Brazilian equities tumbled 20% from the fall of 2013 through last spring, then proceeded to rebound nearly 40% on hopes for a more reform-minded government being elected in the presidential election that took place in October. When that proved illusory, the market started to fade again. From last September’s highs to today, Brazilian equities are down more than 20% and over 40% in U.S. dollar terms. If you look at the longer term, a dollar based investor is basically back to where they were at the start of the bull market in 2009.

Brazilian stocks have underperformed lately.

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Market Realist – Brazilian stocks have underperformed lately.

The graph above shows the benchmark Bovespa Index of São Paulo. As you can see, the Brazilian index has had a rocky ride over the last few years. The index has given a CAGR (compound annual growth rate) of -5.6% in the last five years. The S&P 500 Index (SPY)(VOO), in comparison, has given a CAGR of 12.2% in the same period.

Brazilian stocks had a great run before and after the financial crisis. Both these periods saw higher commodity prices. Remember, the Brazilian economy hinges on commodity prices. Lower commodity prices are one of the reasons why the economy is on weak footing at the moment. You’ll find more on this trend in the next part of this series.

The graph above shows the exchange rate between the US dollar (UUP) and the Brazilian real for the last 12 months. In March 2014, it took only 2.3 reals to buy a dollar. Currently, though, it takes 3.2 reals to buy a dollar. This represents a 28% depreciation in the real in the last 12 months. The dollar has strengthened across the board in that period, though, including against other emerging markets (EEM).

So, if you had invested in Brazilian stocks last year, not only would you have lost your principal due to the dip in the index levels, but you would also have lost ~28% while converting the money back to dollars. Your total loss would be close to the loss on the index plus the loss on the currency.


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