Our Opinion: 2014

World Cup Party in Brazil ?

The World Cup has kicked off but Brazil is not in the mood to party.

Economic growth, which stayed at 4% a year for most of the last decade, has slowed to just 1.9% annually.

Brazil is a major exporter of commodities and China’s appetite for them has cooled. The domestic economy is unlikely to thrive. Consumers borrowed too much in the good times and a rise in inflation to over 6% means that interest rates are likely to rise and growth further reduced.

Structural problems are also becoming obvious, since Brazil simply doesn’t invest enough. The average emerging market invests 25% of its national income is structural projects. In Brazil, that is only 20%.

Capital Economics describes Brazil’s record on implementing public investment programmes as ‘woeful.’ That is demonstrated by the fact that only two thirds of the pre World cup investment programme has been completed.  Businesses have been rattled by perceived Government meddling and are reluctant to invest.

Against that background, the local stock market fell 20% last year.

The Bovespa index is now ranked as one of the world’s cheapest markets. Its cyclically adjusted price-to-earnings ratio is 10.2. This means that the current problems are included in the price and this could be a good time to enter the market.

Brazil has plenty of advantages – a huge, young population (average age of 29) and enough soft raw materials to be an ‘agricultural super power’ according to Tom Phillips in The Daily Telegraph. It is also the world’s top soy exporter and a major producer of corn, sugar cane and beef.

The party may be over for England in this year’s World Cup but, for Brazil itself, it may be just beginning.