There seems to be a different perspective on Brazil from within and outside looking in. The Brazilian Bovespa exchange is one of the best performers in the world. However, despite the fact that foreigners have been net buyers of Brazilian stock since the recession in 2014, the net inflow stopped this year. In fact they have withdrawn $13.6 billion, the largest on record. Is this a general concern over emerging markets, or concern over the new President? The country has seen inflation fall to record lows, but GDP growth is still sluggish and unemployment is still at 12%. Household debt is rising and the quality is deteriorating.
At least the subdued inflation has led to record low interest rates, just recently lowered again to 4.5% and there is still a chance that we could see one more cut. The low rate has led to a massive boom in corporate borrowing, with BRL$346 billion on local markets still year up to November. The bulk of those loans was through corporate bonds, but BRL$78 billion of the borrowing was through the equity market. This is higher than the BRL$249 billion seen all of last year and double the five year average.
The surge in borrowing is reflecting the global trend with the low interest rate environment. No one place could be more grateful than Brazil, which has had to deal with historically high interest rates. The danger though is that the low interest rates are making the savings account of many Brazilians looking decidedly unattractive when looking at the stock market performance. So many are now taking the plunge. That would make more sense of the successful IPO of XP, which gives a channel to many Brazilian to trade stocks and bonds. The danger is that everyone rushes into a risky asset and forgoes savings. If Brazil’s economy struggles, it could spell disaster. Just one recent development that could already throw a monkey wrench into the works, the trade deal between China and the US late last week could impact Brazil’s surging export of beans to China. (We have our doubts. See below)