For the contrarian investor out there, it is always tempting to invest in downtrodden markets. Many times buying into an equity market that has been out of favor can be a profitable investment strategy. However, this type of strategy takes a lot of patience and time because picking the bottom in any market is extremely difficult. Cheap stocks can always get cheaper. A stock market that is off 75% from a recent high may seem like a screaming buy. But is it actually a screaming buy if that same market is still, amazingly, up over 300% over the past 13 years? Aren’t there plausible scenarios where this market could halve from current levels, but that would still mean it is 200% higher over the past 13 years? This is the quandary facing investors who want Brazilian exposure.
In USD terms, MSCI Brazil is now back to levels last seen in 2005. However, as we stated above, it is still 300% higher than the 2002 low even as it is 75% off the 2008 high. So is now an interesting time to invest in Brazil? While it feels like it can’t get worse, we believe investors shouldn’t try to be a hero in this market.
The Brazilian economy is in shambles. Exports are in a free fall down 24% year-over-year. Industrial production is declining at the fastest year-over-year rate since 2009 and has had a negative year-over-year growth rate for 16 months. The unemployment rate has spiked to a five-year high while retail sales are declining at a pace last seen in 2003. Finally, even with excess capacity in the economy increasing and consumption slowing, Brazil is combating inflation as the CPI increased at 9.5% year-over-year rate in August. With this type of economic back drop its fairly easy to understand the pressure that Brazilian stocks have been under. What is harder to understand is how valuations have stayed so high.