A Pivotal Change in Brazil

Executive Summary

Under the PT (Worker’s Party) government ruling for 14 years, Brazil saw a growing fiscal deficit, anti-capitalism and free trade policies, and a lack of central bank autonomy, which resulted in negative GDP growth, higher public debt and consequently, an increase in country-risk. Now, with Jair Bolsonaro sworn in as Brazil’s new president and his market-friendly cabinet, investors are looking at a situation with low inflation rates, credible monetary policy, low capacity utilization rates, pent-up demand and significant political catalysts in the form of social security reform, privatizations and trade liberalization.

This puts Brazil is in the early stages of a potential structural change, which has set the stage for a market-friendly investment environment.  In the past few months, we have begun to see an improvement in consumer confidence, employment, and investment. Valuation multiples are still in-line with historical averages. If Brazil can move forward with the necessary reforms, firm up its fiscal deficit, and leverage the country’s tremendous advantages in natural resources and demographics, Brazilian equities could be set for an attractive multi-year re-rating.

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