This is why it’s time to focus on Brazil

The improved economic outlook for Brazil has sparked interest in investing in emerging market businesses, particularly those in Rio de Janeiro.

The economic prospects for Brazil have significantly improved since the beginning of the year, especially in the short term. According to Schroders, GDP growth expectations for 2023 have been revised upward from 0.8% in January to over 2% today. Looking ahead to 2024, despite the strengthened activity this year, expectations have remained relatively stable, with a projected increase of 1.3%. Moreover, the proposed fiscal framework aims for a balanced budget in 2024, transitioning to a 0.5% primary surplus in 2025 and a 1% surplus in 2026. Although a primary deficit of 1.1% is expected this year, it could approach 2% when factoring in additional spending. The government plans to achieve these long-term goals by limiting expenses to 70% of the growth in federal revenues recorded in the previous 12 months.

The Brazilian real has benefited from improved fiscal and current account prospects, relatively high real interest rates, and reduced political concerns. Traders are now contemplating whether the real can follow the success story of its regional counterpart, the Mexican peso, which is expected to retain most of its substantial gains made from 2020 until July 2024.

Despite a significant rebound in April and May, Brazilian stock valuations remain historically low. Earnings expectations for the fourth quarter and fiscal year 2024 are improving, and GDP growth is exceeding expectations. Brazilian stocks are supported by expectations of monetary easing, relatively stable politics, attractive valuations, and favorable investor positioning. Currently, the focus is on domestically-oriented companies, especially in sectors with higher interest rate sensitivity, such as industrial, financial, and real estate.