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Recession is not new to the Brazilian economy as for the last three quarters the economy has not shown any growth. The Brazilian economy contracted 1.7% in the third quarter of this year, preceded by 2.1% GDP decline in Q2 and 0.7% contraction in Q1. The persistent decline flared up the country’s worst recession in 25 years . Year over year, GDP is off 4.5%. In the first nine months of 2015, the Brazilian economy shortened 3.2%, the largest decline ever, per trading economics . Investment declined for the ninth successive quarter and household spending dropped for the third straight quarter, making the recession acute. A persistent slump in commodity prices has badly hit the commodity-rich Brazilian economy. If this was not enough, China – one of the key trading partners of Brazil – is suffering from a prolonged manufacturing slowdown leading to further woes in Brazilian exports. This once-growing emerging nation – a pillar of the BRIC bloc – has been buckling under dual pressure of slower growth and heightened inflation for long. Inflation in Brazil reached a 12-year high in October and hovered around the 10% level – way above the central bank’s target of 6.5%. The Brazilian currency is down over 30% against the greenback so far this year and is likely to head toward decline once the Fed shoots the lift-off this month. The budget deficit widened the most in at least two decade. Joblessness soared to 8.9% in Brazil during Q3, up from 6.8% a year ago. This left consumers cash-parched and the household spending was down 4.5% in the quarter. Political corruption is also rampant in Brazil. The key interest rate at Brazil is at a nine-year high of 14.25%. In addition, a stagflation-like situation (where measures adopted to tame inflation will halt growth and vice versa) is prohibiting the central bank to hike the rate further to contain inflation. All in all, things are so chaotic, both at home and outside, that any easy way out of this vicious cycle of recession appears impossible. Is There Any Hope for the Market? Quite expectedly, the outrageous economic backdrop called for impeachment proceedings against President Dilma Rousseff on December 2. Charges against her include the violation of Brazil’s fiscal laws and the mishandling of government finances to pursue her re-election campaign in 2014, as per the Capital Economics report. Since Dilma Rousseff’s public support rating is now at record-low, Brazilian stocks rose on December 2. Since last year, we have seen that any news against Rousseff turns out favorable for the stocks as her administration is known to implement excessive red tape in the private sector. The investing world is now betting on an expulsion of the president, though this will take months if it all materializes. Moreover, UBS analysts commented that the political surroundings could be better off in 2016 to promote growth-oriented reforms and hence took a neutral stance on Brazilian stocks and sovereign debt (despite Brazil’s credit rating was slashed to junk in September) and even the currency real. However, bearish views are there as well. Experts like JP Morgan believe that no matter what happens to Rousseff, this impeachment process will delay government work and ‘paralyze the government’s fiscal agenda during the next month’ as the spotlight will be entirely on the political movement now, which might translate into a deeper recession. Whatever the case, the markets cheered the expected end of the prolonged political deadlock and pushed up these Brazilian stocks and ETFs, though we are unsure about the sustainability of these gains. Stocks to Watch Itaú Unibanco Holding S.A. (NYSE: ITUB ) The company functions through commercial bank, retail, consumer credit retail and wholesale bank segments in Brazil and overseas. As financial stocks moved up, this Zacks Rank #3 (Hold) banking giant advanced over 6% in the last two days (as of December 3, 2015). The stock has a Momentum score of ‘A’. Petróleo Brasileiro S.A. – Petrobras (NYSE: PBR.A ) The largest publicly-traded Latin American oil company has long been fraught with corruption scandal. Its high-profile officials were allegedly involved in multi-billion dollar laundering and bribery. Also, the Brazilian government, the company’s majority shareholder, has a history of political interference in Petrobras’ affairs. Thus a probe into Rousseff’s government sprung sweet surprises for this company. PBR has a Zacks Rank #3 and added 8.6% in the last two days. PBR has a Zacks Value score of ‘A’. Centrais Elétricas Brasileiras S.A. – Eletrobras (NYSE: EBR ) The company funcations in the power utility sector and together with its subsidiaries, generates, and distributes electricity in Brazil. In the last two days, the stock advanced about 12.6%. ETFs to Watch The ultra-popular large-cap MSCI Brazil Index Fund (NYSEARCA: EWZ ) added about 5.9% in the last two days (as of December 3, 2015) on blows against Rousseff and also advanced about 0.1% after hours. However, the fund is down 34.6% so far this year. EWZ has a Zacks ETF Rank #4 (Sell) with a High risk outlook. However, due to slumping activities in Brazil, it is wiser to stay away from small-cap ETFs like Market Vectors Brazil Small-Cap ETF (NYSEARCA: BRF ) and iShares MSCI Brazil Small Cap Index (NYSEARCA: EWZS ) as small-cap stocks are tied more to domestic economic activities. Still BRF and EWZS were up over 3.6% and 5.9% respectively in the last two days on calls for Rousseff’s impeachment. Both BRF and EWZS carry a Zacks Rank #5 (Strong Sell) and are down respectively 43.3% and 45.5% so far this year. Original Post Scalper1 News
Scalper1 News