By: Joseph Hogue of Street Authority
Shares of Brazilian companies listed on U.S. exchanges have made a remarkable comeback since March. The reasons given in the financial press would be comical if they were not so ridiculous.
For instance, one pundit says the World Cup, though well over budget and a spectacular failure for the home team, will mean faster economic growth in the second half of the year.
That's just a sample from a list that goes on and on... but nobody's acknowledging the economic reality that is poised to bring stocks down again.
Stocks Bounce -- But Not For Long
In November, I examined the country's deep fiscal problems and predicted lower economic growth on higher rates. Since then, analysts have downgraded estimated 2014 economic growth to just 1.2%, down from expectations well above 2% last year. In March, the country's debt was downgraded to BBB- (one level above junk) by Standard Poor's, and the government will likely miss budget targets this year.
Shortly after my article came out, Brazilian stocks plummeted, with the iShares MSCI Brazil Fund (NYSE: EWZ) falling 18% in just three months. Shares of Petrobras (NYSE: PBR), forecast to be the hardest-hit for its role as state-controlled piggy bank, fell almost 38% over the period.
While Rousseff's approval ratings have been dropping, investors are underestimating the power of her political base and the government's ability to manipulate the electorate with social programs. The government has boosted cash transfers to the poor and increased tax exemptions. Price controls have lowered electricity by 30% and bus fares by 20% over the past year. Continue reading "After The World Cup, Nothing Can Save Brazil"