Brazil down -28% in just a month! What’s going on?

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Brazil ( EWZ , quote ) -28% in a month...What's going on?  Where to start and the core reasons for the recent run are hardly new themes.

[caption id="attachment_62393" align="alignright" width="280" caption="Brazil's Bovespa stock exchange in Sao Paulo"] Image courtesy Evandro Miquelito: http://www.flickr.com/photos/emiquelito/ [/caption]

There is also a thread tied through these factors as we wrote yesterday, President Dilma's popularity ratings are at lows (30%) while her team and party look to be very vulnerable in the 2014 November elections.

All of this is weighing on the Brazilian Real, which is 16% lower against the dollar in the current slide.

The BRL slide is a function of the political uncertainty and the lack of clarity on what they intend to do with both monetary and fiscal policy.

The currency is also weak because the economic data coming out of Brazil suddenly looks recessionary out in the next couple quarters if there is not a reversal in trend. Yesterday's IP release was dismal and missed consensus estimates.

Another major factor is one that hits investors closer to home with disappointing corporate governance and earnings.  The Eike Batista empire was selling billions of Dollars (or BRL) of stock to investors willing to bet on his commodity and infrastructure empire.

This all seemed to be part in parcel with the Brazilian success story and a party that would reap big returns for investors.

The problem is that investors were sold companies who had levered balance sheets in a declining commodity market, with underlying assets that either were not as impressive as advertised, or flat out not worth the money they were sold for.

The Housing sector was a place where everyone followed early pioneers like Sam Zell into the concept of the greatest middle class opportunity in emerging markets.  The problem that has befallen investors is that most of the Brazilian homebuilders traded publically became loss leading, cash burning, receivables growing entitles with falling margins.

Now a few of them may actually go to zero.  Oh and by the way, with all this bad credit going around the banks look suddenly vulnerable.

Finally, after a 50+% move lower in the market since April 2011 you still don't have a market that is terribly cheap on multiples.   Technically, the IBOVESPA is testing 45K which is mostly psychological support.

The real support comes near the '08 crisis lows - yes, that's right, Brazil would be back to the lows of 2008 around 37,500 on the index.

So to sum up, I'm beginning to see panic selling but not enough yet.  With riots escalating and macro flows still a headwind on tapering, Brazil is still a no touch.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , International , Stocks

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