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Protesters are lining the streets of Brazil’s major cities, demanding everything from lower bus fares and less corruption to a new political system.
Amidst anemic growth, Brazil’s policymakers have misdiagnosed the economy’s supply side bottlenecks and lack of structural reform and have instead opted for a sustained demand-side push. This misdiagnosis has meant that massive fiscal and monetary stimulus has failed to lift Brazil’s growth by much.
Now, as inflation is rising, room for further policy stimulus is limited. Additional fiscal stimulus will only lead to more inflation and cause the currency to drop significantly further. In turn, interest rates will shoot up even more. As such, the current economic and political backdrop is bearish for Brazil’s financial markets, including equities, the real, domestic bonds and sovereign and corporate credit.
Our Emerging Markets Strategy service continues to recommend shorting the real versus the US dollar, and underweighting Brazilian sovereign credit and equities within EM credit and equity portfolios.
This post was originally published by the BCA Research blog.