Rational anxiety in Brazil
FOR much of this year, Brazilian shares have been a ticket to riches. In the six months to June, the Sao Paulo stock exchange rose 82% in dollar terms, a return bettered only by Russia’s stockmarket. Then came panic. Fearful that Brazil would succumb to the kind of currency bug afflicting South-East Asia, investors dumped their shares. Sao Paulo’s Bovespa index fell by 15% in the week to July 18th. It has recovered much of the lost ground, but not its lost lustre. The market has turned highly volatile, suggesting that, at least for a while, the good times are over.
Currency problems have little to do with the stockmarket’s edginess. True, many economists believe that the real is overvalued by around 20%, and Brazil’s current-account deficit weighs in at $32.2 billion (or 4.2% of GDP in the year to June). But there the similarities with Thailand end. The government has sought to keep the balance-of-payments deficit within reasonable bounds by slowing the economy. Most analysts now expect growth of less than 3% this year, down from earlier forecasts of 4%. And not only does Brazil have $57 billion in foreign-exchange reserves, but around 40% of its current-account deficit is likely to be financed by long-term foreign direct investment. The currency markets have seemed reassured by all of this. The real has barely budged despite the Asian upheavals.
So what prompted the stockmarket plunge? Many analysts reckon it was an overdue correction after some feverish buying, particularly of Telebras, the state-controlled telecoms holding company whose shares account for 45% of the Bovespa index. Rising share prices and falling interest rates had prompted some of Brazil’s mutual funds to switch from bonds to equities. It was these investors who led the profit-taking. By contrast, many foreign investors remain optimistic. Several Wall Street brokerages issued buy recommendations for Brazilian shares as their prices fell last month.
Politics may increasingly disrupt the Bovespa’s resurgence. President Fernando Henrique Cardoso plans to stand for a second term in October 1998. Reports of election-related infighting among the government’s supporters clearly make the market nervous. Paulo Nogueira Batista, an economist at the Fundacao Getulio Vargas, a business school, interprets increased share-price volatility as a sign that investors are not convinced that the government will continue to sacrifice economic growth on the altar of monetary prudence. Perhaps. Or maybe investors have simply decided that the law of gravity applies in Brazil as much as anywhere else.
Article source: http://www.economist.com/node/153101?fsrc=rss