Brazil’s Stock Market Struggles Continue

Brazil_Underperformance

Stock markets around the world have been battered in recent months, but Brazil’s has been hit the hardest. Since the start of July Brazilian stocks have lost more than one-third of their value. This slump is the continuation of a larger trend in which Brazilian stocks have underperformed emerging markets for years, and they have lost about two-thirds of their value since the start of 2010. Is there anything that can turn around the country’s fortunes?

Brazil has long battled economic headaches such as high inflation and low worker productivity, but this year its problems have accelerated. Its economy is in a recession, it’s suffered from the decline in commodity prices, the value of its currency has plunged, and the country’s most prominent company, Petrobras, is mired in a massive corruption scandal. Earlier this month Standard & Poor’s downgraded Brazil’s credit rating to junk status.

Given this litany of tribulations, Brazil’s situation may seem hopeless. But there are a couple key factors that could allow the country’s stock market to bounce back.

One is that Brazil may be less exposed to commodity prices than it has been in the past. After the energy sector’s recent struggles and the crisis at Petrobras, the energy sector now comprises less than 10% of the country’s stock market. This exposure is less than many other countries (almost half of Russia’s market, for example, is in the energy sector) and not that much higher than emerging markets overall. With a weak global economy threatening to keep commodity prices subdued, this lower prominence of energy stocks could reduce the headwind for Brazil’s market.

A second potential boon could be better government policies to steer the country back to economic growth. Brazilian stocks rose in the summer of 2014 when it looked like president Dilma Rousseff might lose her re-election bid to a candidate advocating more investor-friendly policies. Rousseff ultimately prevailed, but her approval rating is now in the single digits. Her unpopularity may force her to either revise her policies or leave office, either of which would likely boost Brazilian stocks.