Brazil's Stock Market Rebounds
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2011 will be remembered as the year the BRICs (Brazil, Russia, India and China) hit the wall as all of the stock markets in these countries were lower, dragged lower by the continuing debt crisis in the developed world. Brazil is well known to emerging markets investors as the B in the acronym BRIC and its Bovespa index fell by 17% last year.
However, thanks to renewed investor optimism, things are looking much better in emerging markets like Brazil. One needs only look to the data on equity fund flows to see proof of that optimism. Emerging market funds attracted $11.3 billion in total inflows so far this year. As a result, on average, emerging markets are up about 15% in 2012, the best start to a year since 2006.
The gain in Brazil's stock market, the largest in Latin America, is particularly noteworthy since Wall Street has been so negative on the country. The Bovespa Index hit a low in August at the 48,668 mark but has surged since and today is trading comfortably above the 66,000 level, a gain in excess of 35%. In fact, in dollar terms, the Bovespa gained 20% in January alone.
The question for investors is whether this gain can be maintained or added to over the course of 2012. After all, 2011 started out well too before turning nasty. That question is open for debate as Brazil's economy definitely has some issues to contend with.
Brazil experienced its highest GDP growth rate in decades in 2010, at 7.5%. This led directly to the reemergence of inflation in the country, reaching 7.3% in August 2011. Inflation forced Brazil's central bank to raise its key benchmark interest rate all the way to 12.5% in order to stem inflation. Financial and construction stocks took a big hit as a result.
Add in fears over global growth, which clobbered index heavyweights Petroleo Brasileiro S.A. (NYSE: PBR) and Vale (NYSE: VALE). Petroleo Brasileiro is Brazil's national oil company with the most exciting offshore oil discoveries in the world while Vale is the world's second largest mining company and the biggest producer of iron ore. It should be added that both companies were also negatively impacted by increased government interference in their operations.
That combination left Brazil with a stock market with nearly everything down and a weakening economy. Brazil's economy actually contracted in the third quarter of 2011.
Since then, Brazil's central bank has reversed policy and has been cutting interest rates aggressively in an effort to get economic growth accelerating again. The bank's most recent cut took the benchmark rate down to 10.5% with expectations in the marketplace for further rate cuts soon.
This is fantastic news for Brazil stock market investors, many of them Americans. Investors can easily participate in the Brazilian stock market through ETFs. Two of the most liquid funds are the iShares MSCI Brazil Index Fund and the Market Vectors Brazil Small-Cap ETF.
With the liquidity wave going around the globe, another positive for the Bovespa right now is the hope for higher commodity prices boosting Vale and Petrobras too. Commodity stocks along with property and construction stocks have led the charge higher so far this year. This may bode well for another ETF, the Emerging Global Shares INDXX Brazil Infrastructure Index Fund, which contains a lot of those type of stocks along with utility stocks.
Problems do remain though. Inflation remains stubborn at 6.4% and if Brazil's economy resumes a strong growth pattern, interest rates are likely to once again move higher.
For now though, as with other markets around the world, things are looking up.
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