One Number in Support of Brazilian Stocks
Calla is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
(Note: The original version of this post incorrectly stated that Brazil's population totaled 280 million people. According to the World Bank, the correct figure is 195 million. This post has been changed to reflect this.)
After weeks of losses for Brazil's main stock index, the Brazilian statistics bureau, IBGE, reported good news on May 24th: unemployment across Brazil fell from 6.2% in March to 6% in April. Yes, the Brazilian unemployment rate is lower than that of the United States and most of Europe. I take this number as a sign that the market may have thrashed Brazilian stocks too harshly in the past two months.
Brazilian stocks have tumbled at an alarming rate since March. The largest Brazilian ETF, iShares MSCI Brazil Index Fund (NYSEMKT: EWZ) is hovering just above $50, down from its $70 high in March. Its components have delivered sour earnings reports and plunged as a result: oil giant Petrobras (NYSE: PBR) is down 41% YTD and nearing its four-year low after reporting low earnings, and the mining company Vale (NYSE: VALE) is nearing a three-year low on falling demand for steel. iShares Brazil's substantial banking holdings in Banco Itau (NYSE: ITUB) and Banco Bradesco (NYSE: BBD) are clocking negative gains as well, at -25% and -16%, respectively.
There are good reasons behind the market’s turn away from Brazil. The emerging markets rush in 2009 overvalued many Brazilian companies. Brazil reported steamy 7% GDP growth for 2010, and more investors poured into heavyweights like Petrobras and Brazilian ETFs. Then Brazil’s largest trading partner, China, slowed and Brazil’s 2011 growth dropped to 2.7%. Additionally, commodities and finance account for the majority of Brazilian public companies’ business, and both sectors have clocked declines from low demand and high fear in Europe and China. To make matters worse, IBGE released successive reports of rising inflation and unemployment.
There is plenty to be worried about. Emerging market funds and parastatal foreign companies are risky investment categories. But Brazil is far from recession; the country reported better employment and growth data in May than the United States and most European countries. Additionally, IBGE expects unemployment to remain stable and revised its growth forecasts upwards to 3.2% for 2012. And those inflation worries? They are reasonable considering Brazil’s history of hyperinflation, but annual inflation of 5% hardly calls for panic.
In sum, Brazilian stocks have had a bad quarter and rightly so. But I believe that the market has overreacted to cyclical declines in commodities and the specter of European contagion in banks. The recent Brazilian jobs report shows that by some metrics, Brazil is doing better than the United States and Western Europe. And with a domestic market of 195 million consumers, I am bullish on Brazilian companies going forward.
CallaMarie owns shares of Companhia Vale Ads and Petroleo Brasileiro S.A. (ADR). The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.