Why has Brazil’s growth slowed in recent years?

Mayur Sontakke

An investor's must-know guide to emerging market equities (Part 3 of 6)

(Continued from Part 2)

About the Brazilian economy

Brazil, a $2.5 trillion economy, is the seventh largest economy in the world. Brazil exports commodities such as iron ore, cotton, and coffee. Brazil also exports automobile equipment and other transportation equipment. China accounts for 17% of Brazil’s $256 billion exports, while the United States accounts for 11%. Brazil is estimated to have a 107 million–strong workforce as of December 2013.

Brazil’s economic growth has slowed considerably since 2010, primarily due to low commodity prices.

About the Brazilian stock market

BM&F Bovespa is the primary stock market in Brazil, while Ibovespa (BVSP) serves as the key equity index. The index constitutes 50 stocks, led by Petrobras (PBR), which has a 14.8% weight in the index, and followed by Vale SA (VALE), which has an 11.3% weight in the index. Petrobras is an energy company with $130 billion in revenues in 2013, while Vale SA is an iron ore mining giant with $44 billion in revenues in 2013. The Ibovespa index has fallen by 8.5% over the past year due to pressure on corporate profitability due to lower commodity prices. Both Petrobras (PBR) and Vale SA (VALE), the two biggest components of Bovespa (BVSP), have lost over 10% over the past year. Petrobras’ stock price has been impacted by various reasons, such as operating inefficiencies and financial irregularities, while that of Vale SA is primarily impacted due to subdued iron ore prices.

The impact of Treasury yields on the Brazilian stock market

We can infer from the above chart that the Brazilian stock market hasn’t shown a significant correlation with ten-year Treasury yields over the past year. The correlation coefficient between Bovespa and the ten-year Treasury yield over the past year is -0.45, meaning Bovespa and ten-year Treasury rates have negatively correlated for the past year, and only 20% (0.45*0.45) of the variation in Bovespa is explained by the variation in ten-year Treasury yields. The remaining 80% variation in the stock market has primarily been driven by a confluence of local factors, such as high inflation and operating inefficiencies at Petrobras, and global factors, such as subdued commodity prices.

Apart from investing in NYSE-listed Brazilian corporations such as Petrobras (PBR) and Vale SA (VALE), investors can invest in Brazil-specific ETFs such as the iShares MSCI Brazil Index Fund (EWZ) and the Market Vectors Brazil Small-Cap ETF (BRF).

To find out about how the Russian stock market correlates with the U.S. Treasury bond market, read on to the next part of this series.

Continue to Part 4

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