Brazil's Stock Market May Be Eclipsed by Mexico's

  • Mexico's market capitalization is catching up with Brazil's
  • Brazil currency plunge crushing returns for overseas investors

For the past two decades, Brazil has been the indisputable king of Latin American stock markets. At one point a few years ago, its market had gotten so big that it was almost four times larger than that of its nearest rival, Mexico. In fact, you could have added up the stock market value of every other country in the region and it would have fallen well short of Brazil’s $1.7 trillion.

But now, as the nation’s recession and political crisis deepen and its currency plunges, Brazil’s grip on the top spot is suddenly weakening. That gap over Mexico, once as much as $1.1 trillion, is down to just $133 billion. And while stock pundits aren’t necessarily predicting that this slim lead will disappear entirely, a regression analysis of the current pace of declines indicates that it could happen over the next 13 months.

It’s not that Mexico’s market, and economy, are doing great. They’re not. Much like Brazil, the nation has been bruised by the plunge in commodity prices (in Mexico, it’s oil; in Brazil, it’s everything from soybeans to iron ore). But Mexico’s equity market is less tied to commodities than Brazil’s is, and what’s more, the economic slowdown hasn’t been nearly as pronounced.

Brazil’s gross domestic product shrank 2.6 percent in the second quarter, part of a slump that economists predict will mark the steepest recession in 25 years. The real has plunged 29 percent this year, making it the worst performer against the dollar among major currencies. The declines have been exacerbated by an 18-month-old corruption scandal that started at the state-run oil company and is now fueling calls for President Dilma Rousseff’s impeachment.

Gregory Lesko, a money manager at Deltec Asset Management, also explains the narrowing gap by pointing to the differences in government policy: Rousseff has been ramping up the state’s role in the economy while her Mexican counterpart, Enrique Pena Nieto, has opened up key industries like oil to more foreign investment and boosted competition in telecommunications. Brazil’s credit rating has been cut to the cusp of junk.

“We need to see a change in government policy before we see any broad based interest in Brazil’s market,” Lesko said in an interview from New York.

Brazil’s market capitalization has contracted 34 percent this year to $531 billion, while in Mexico the market has shrunk 11 percent to $397 billion. That’s left Brazilian stock capitalization at 1.3 times that of Mexico’s, down from 3.8 times as recently as May 2011.

Since that time, the real has lost more than half its value while the Ibovespa has dropped 28 percent in local-currency terms. In that same span, Mexico’s peso weakened 32 percent and its benchmark stock index gained 20 percent.

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