For investors in Brazil battered by a terrible 2015, there was reason to believe January would provide a respite. With summer holidays in full gear and Congress in recess, developments in the political scandals that had roiled markets were put on hold.
And then came China.
The turmoil in Brazil’s largest trading partner sent its benchmark stock index down 8.2 percent in dollar terms to begin the year, making for the worst week in almost six months, as shares of commodity producers tumbled with raw materials to the lowest in more than a decade. The currency weakened past 4 per dollar, back to levels seen after Standard & Poor’s surprised investors by cutting Brazil to junk in September.
Now stocks from Latin America’s largest economy are once again getting punished worse than emerging-market peers, adding to the pain investors have felt over five consecutive years of declines for the Ibovespa. The worsening slowdown in China is only making it more difficult for Brazil to pull itself out of its worst recession in more than a century amid soaring inflation, a widening fiscal deficit and efforts to impeach the president that are making the situation all the more chaotic.
“The scenario is not pretty,” said Maarten-Jan Bakkum, a senior emerging-markets strategist at NN Investment Partners in The Hague with about USD206 billion under management. “I’m very worried about the external pressures on Brazil, the poor policy response and the political situation, which makes quick solutions unlikely. China will continue to slow, global liquidity will tighten and Brazil has had bad economic policies for too long.”
The 15 percent selloff in Chinese stocks this year amid confusion over circuit-breaker procedures and bets on a weaker currency revived concerns over the Communist Party’s ability to manage an economy set to grow at the weakest pace since 1990. Brazil’s exports to China totaled $35.6 billion in 2015, about 19 percent of the total goods sent abroad, according to government data.
The impact of China’s slump isn’t restricted to Brazil, of course. U.S. equities capped the worst week since September 2011, while just five of 24 emerging market currencies have gained against the dollar.
But for Brazil, the China trouble comes while the country is already beset by its own problems. Inflation accelerated to a 12-year high in December, more than twice policy makers’ target. Analysts estimate a 3.73 percent economic contraction in 2015, followed by a 2.99 percent decline in 2016. The recession deepened as some of the country’s largest companies get entangled in the largest corruption case in Brazil’s history, which has also worsened the political crisis as top ranked legislators came under investigation.
Meanwhile, President Dilma Rousseff is fighting for her political survival after lawmakers initiated impeachment proceedings in December. The president and her opponents are currently at a standstill with the Supreme Court and Congress on recess until Feb. 2.
“It’s a little bit cliched to say at this point, but it really is the perfect storm,” said Marianna Waltz, the managing director for the corporate finance group at Moody’s Investors Service in Sao Paulo. “The slowdown in China hits Brazil directly. In Brazil, you have commodity producers and companies with a domestic focus, and now they’re all in trouble – and we don’t see that getting better.”
For every Brazilian corporate rating upgrade in 2015, Moody’s cut five others.
Commodities account for about 46 percent of Brazil’s exports – prices for two of the largest, soybeans and iron ore, have dropped 16 percent and 41 percent, respectively, in the past 12 months. Data released Thursday showed Brazil’s industrial production fell 2.4 percent in November, more than all analyst forecasts. Consumer confidence as measured by the Getulio Vargas Foundation reached a record low in December.
Brazil’s real has dropped 1.5 percent this year after losing a third of its value last year, the worst performance among 16 major currencies tracked by Bloomberg. The perception of risk in holding the country’s dollar bonds, as measured by credit-default swaps, is more than twice the average of the past five years. While Brazil’s sovereign notes outperformed global peers last week, its corporate overseas bonds now have a higher yield than the average for junk-rated notes from developing nations.
The recession is likely to continue to push asset prices lower, according to Simon Nocera, the chief investment officer at Lumen Advisors LLC, who says he’s been underweight Brazilian equities since the end of 2009. Ben Bain, Paula Sambo and Filipe Pacheco, Bloomberg
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