What does Bolsonaro's win mean for Brazilian stocks?

What does Bolsonaro's win mean for Brazilian stocks?

Equities 6 minutes to read

Peter Garnry

Head of Equity Strategy

Summary: Investor optimism is high in the wake of right-wing politician Jair Bolsonaro's Brazilian election win, but Brazilian shares are not exactly cheap, and the country still faces severe structural issues.

Investors are showing significant optimism on Brazilian equities following Jair Bolsonaro’s election victory in Brazil. Political commentators have explored the potential for closer links between the US and Brazil and away from China as the latter has groomed relationships with Brazil to preserve a steady supply of key raw materials for China’s economic boom.

Bolsonaro's right-wing stances, complete with counsel from University of Chicago-trained financial advisor Paolo Guedes, could be seen as making him a natural ally to the pro-business US president. The long-term disconnect between politics and equity markets, however, is often huge and investors should be careful about turning too optimistic on Brazil. The country’s unemployment rate has spiked over the past four years following the collapse in commodity prices, stronger USD and higher interest rates.

Brazil is still one of those countries that played its hand very badly during the commodities super-cycle. But even more importantly, the equity market is not cheap enough to warrant risk-taking by foreign investors.

Brazilian equities are not outright expensive as they were in the last year before the Great Financial Crisis in 2008, but they are certainly not cheap as corporate profitability has plummeted during the recent weak macro years. In terms of valuation we are observing 0.5 standard deviations of 'expensiveness' across our preferred nine valuation metrics.

But how important is that for future returns?

Based on the short history of credible data on Brazilian equities, there is a clear link between valuation and their subsequent realised real return, as expected. Based on the current valuation, the expected 10-year annualised real return is around 3% (with a wide confidence band).

That’s attractive on the surface but these numbers are in BRL so the attractiveness is only valid for domestic investors. For foreign investors, the opportunity looks less attractive. The current average inflation rate is around 4.5% and if it stays at that level over the coming years, then the expected nominal return in BRL is around 7.5%.

Unfortunately, foreign investors cannot capture this expected return. For a European investor there are two options. You could invest in Brazilian equities and assume the currency risk in EURBRL or, alternatively, invest in Brazilian equities and hedge the currency risk.

The current Brazilian one-year interest rate is around 7% and the one-year euro area rate on a GDP-weighted basis is 0.6%. When a European investor hedges the currency risk, the attractive local return disappears.

Ultimately, Bolsonaro's victory is not enough to change our view. The opportunity is interesting for local investors, but for many foreign investors the Brazilian equity market is not attractive enough if one does not want to assume the currency risk.

For more on Bolsonaro and Brazil, see Saxo Bank Head of Forex Strategy John Hardy's take on the Brazilian real.

Quarterly Outlook Q1 2023: The models are broken

The models are broken
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.

Steen Jakobsen,
Chief Investment Officer
Read article
Refitting China’s broken growth engine
A political switch in China towards less tough control of its people and companies may kick things back into gear.

Redmond Wong,
Market Strategist
Read article
Broken Europe
While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.

Chris Dembik,
Head of Macroeconomic Research
Read article
A painful phase transition
As the world turns increasingly bipolar, equity markets face harsh times as they transition into the new reality.

Peter Garnry,
Head of Equity Strategy
Read article
Opportunities in a deglobalising world
New alliances and collaborations outside of China may lead to prosperous times in Asia.

Charu Chanana,
Market Strategist
Read article
Is the ‘balanced’ 60/40 equity/bond portfolio a thing of the past?
For years, it was thought that the balanced portfolio was a thing of the past. But recent developments may have changed that.

Peter Siks,
Investment Coach
Read article
China reopening will drive another strong year for commodities
Following a dramatic and volatile 2022 with good returns, a lot of this year's commodity performance may be driven by Chinese politics.

Ole S. Hansen,
Head of Commodity Strategy
Read article
Latecomers to tightening party, EUR and JPY, may prove safest harbours in the first half
2023 could be a tough year for currencies but EUR and JPY may have some upside.

John J. Hardy,
Head of FX Strategy
Read article
China reopening a boon to Australian assets?
The commodity-heavy Australian market may have a good start to 2023, as the Chinese focus on growth signals demand for Aussie resources.

Jessica Amir,
Market Strategist
Read article
Can institutions save crypto before retail vanishes?
From a near-perfect environment for speculative assets before 2022 to the opposite, crypto faces fundamental challenges.

Mads Eberhardt,
Cryptocurrency Analyst
Read article

You can access all of our platforms from a single Saxo account.

Preview platform Open Account

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Manage consent

Details Cookies

Cookie policy

Necessary

What does Bolsonaro's win mean for Brazilian stocks?

Peter Garnry

Share

Latest Market Insights

Quarterly Outlook Q1 2023: The models are broken

The models are broken

Refitting China’s broken growth engine

Broken Europe

A painful phase transition

Opportunities in a deglobalising world

Is the ‘balanced’ 60/40 equity/bond portfolio a thing of the past?

China reopening will drive another strong year for commodities

Latecomers to tightening party, EUR and JPY, may prove safest harbours in the first half

China reopening a boon to Australian assets?

Can institutions save crypto before retail vanishes?

Your browser cannot display this website correctly.