Brazilian stocks have been rising, but stubborn inflation could halt recent gains. Brazil’s equity benchmark Bovespa index hit a record high in late August, rebounding sharply from steep losses so far this year. In 2024, Bovespa fell by 11.3% at one point. The shift was driven by strong economic data and the Fed signaling the end of its more than two-year tightening cycle. Lower U.S. interest rates can reduce the value of the dollar, making it easier for other countries to pay or take on new dollar-denominated debt. Last week, Brazilian Finance Minister Fernando Haddad said the government expected the economy to grow by more than 3% this year. This is higher than the previous forecast of 2.5%. .BVSP YTD Mountain Bovespa year-to-date However, further gains will be more difficult as the fiscal stimulus implemented over the past year is likely to keep inflation high and force the country’s central bank to raise interest rates. “The reality is that fiscal generosity is forcing central banks to overcompensate for too loose fiscal policy,” Alberto Ramos, head of Latin America economics at Goldman Sachs, told CNBC. “Our view on current and future inflation is The fiscal situation is very concerning. It is a work in progress and will likely require further interest rate hikes from the central bank.” Ramos’ views are in line with those of other economists who generally predict stronger than expected economic growth in the second quarter. , interest rates will be raised next week. To be sure, Ramos believes Brazil’s interest rate hike cycle will likely be short-lived as the Fed begins to ease monetary policy. While this macroeconomic environment is not the most supportive for local stocks, Ramos hopes a series of modest rate hikes over a shorter rate hike cycle will be enough to improve inflation expectations. BCA Research’s Arthur Budaghyan agreed that Brazil’s central bank was unlikely to raise interest rates in the long term. He also thinks the central bank will cut interest rates next year. But he warned that doing so could lead to a recession. “We believe that the new central bank will adopt a more dovish monetary policy, so there is a potential bias, so the Brazilian central bank will be more dovish than it should be in the next two years.” The company’s chief emerging market strategist said in an interview with CNBC . “As a result, inflation will not fall back to target but will remain above the central bank’s target.” Budadjian added: “When inflation is out of the bottle, it will either continue to spiral out of control or it will take a recession to put the devil back in.” in a bottle.” “It takes pain.” What to do? Against this backdrop, Budajian advises clients to avoid Brazilian stocks in the near term. Others are more optimistic. Strategists at MRB Partners are overweight Brazilian stocks, noting that the country’s tightening policy has been priced in by the market. The country’s stock market trades at a significant discount relative to other emerging markets, they added. “Growth will remain resilient, which has already led to upward revisions to 2025 EPS forecasts, while valuations are attractive and the stock is oversold. Stay Overweight,” they said. U.S. investors who want to invest in Brazilian stocks can do so through the iShares MSCI Brazil ETF (EWZ). The fund charges 0.59% fees and is down 15% year to date.
