Gain in Brazil's Stock Market Since 2000: +235%

By Simeon Hyman and Karl Cates | May 7, 2012
  • What's Happening

    What's Happening

    Brazil is no sprinter. The world's eighth-largest economy has grown at a 3.25 percent annual clip since 2000, compared with 2.7 percent for the U.S. and 10 percent for China. Brazil's stock market, however, is up more than 12 percent per year on average over the past 12 years -- compared with about 1 percent for the S&P 500 and 5 percent for Hong Kong's Hang Seng Index. Can it continue to race ahead at such a heart-thumping pace? The answer largely depends on three important variables: Brazil's inflation rate, China, and stock valuations.

    Photograph by Yasuyoshi Chiba/AFP/Getty Images

  • Why It Matters

    Why It Matters

    Inflation in Brazil gets out of control every so often, and it can hammer stocks. Inflation topped 10 percent in 2002, driving equities down by more than 50 percent. The current Bloomberg consensus is for a more moderate 5 percent inflation rate in 2013, so that's not a big worry. But then there's China, the biggest importer of Brazilian commodities. That demand also affects investors because energy and materials account for more than 40 percent of the Brazilian stock market. Right now, the consensus outlook for China GDP is positive, calling for a slight increase next year, to 8.4 percent. Meanwhile, Brazil's stock valuations are reasonable, with a price-earnings ratio of about 11 times 2012 estimated earnings across the MSCI Brazil Index.

  • What It Means for Your Portfolio

    What It Means for Your Portfolio

    Because (1) Brazil's inflation is moderate, (2) China doesn't appear to be on the ropes and (3) valuations aren't bad, Brazilian stocks may be a good bet now. There are caveats, though, and the biggest one is the global economy, and not just with respect to exports. Brazil could also be vulnerable to investor fear should the global debt crisis worsen. Italo Lombardi, a Latin America economist at Standard Chartered Bank, connected the dots recently when he pointed out that concerns have spread from Greece to Portugal and Spain. "In this scenario," Lombardi said, "risk aversion tends to go up, which affects demand for Brazilian assets in general, including stocks."

    Photograph by Keiny Andrade/LatinContent/Getty Images

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