The MSCI Brazil Index has declined by ~5% since the start of the year in local currency terms, compared with a ~5% increase in the broader MSCI Emerging Markets Index over the same period. 

Economists at Capital Economics had expected Brazil’s stock market to be among the best performers in the world this year, but with the virus still running rampant and populist policymaking on the rise, they now think its underperformance will continue for some time.

Key quotes

“The continued spread of the coronavirus in Brazil has pushed back the economic recovery. The economic damage already wrought by the virus has meant that domestically focused sectors of the stock market have struggled over the past year. And with the virus still spreading rapidly in Brazil, this looks likely to persist longer than we had previously thought, delaying any positive effects from economic reopening.”

“The risks from domestic policy have increased. We suspect the recent intervention at Petrobras may be a symptom of this. And even if further policy interventions are not quite so drastic, we suspect that the trend towards greater state intervention has probably reduced the chances of further economic liberalisation and reform, which would weigh on future growth.”

“We still think the stock market can gain from here, though. The vaccination programme is proceeding, albeit at a slower pace than many had hoped, and we still expect it to usher in an economic recovery eventually, which should support the domestically focused sectors of the market. These factors will still outweigh any negative effects from the decline in commodity prices we forecast.”

“We forecast the MSCI Brazil Index to increase by ~7% from its current level in local currency terms, which would imply it finishes the year only slightly higher than its end-2020 level and underperforms our forecasts for most other MSCI emerging markets indices. Nonetheless, as the economy does eventually recover, we still expect the MSCI Brazil Index to increase at the somewhat faster pace of 15% in 2022, more in line with our forecasts for other emerging markets.”

 

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