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Why the Brazil PMI confirms a downward spiral (Part 4)

Sr Emerging Markets Analyst

Continued from Part 3

The latest PMI placed Brazil under the 50 point line, signaling contraction

Out of the five key sub-indices making up Brazil’s (EWZ) PMI, five posted drops.

Drivers of market drops

The MSCI Brazil index has tanked over the past six months, dropping approximately 25% due to a combination of factors. These factors include the following.

  • Foreign exchange losses due to a weaker currency
  • Reduced growth expectations due to lower exports and weaker domestic demand
  • Political uncertainty given protests and the drop in government approval rate

(Read more: How investing in emerging markets differs from developed markets)

Reduced growth expectations

The downward trend in growth has now been compounded by the implied negative growth posted by the PMI. The renewed upward pressure of inflation and climbing unemployment are clearly negative signals for growth prospects.

Plus, the social unrest and depressed approval rate of President Dilma Rousseff have investors worried that Brazil may elect a new candidate next year. This could open the door for a populist candidate to take over, as has been the case in several other South American countries.

(Read more: Why recession in Brazil is not imminent, but the short term will hurt)

Continue to Part 5: Implications for investors

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