As Brazil's Economy Falls Like a Bric(k), Value Investors Take Note
Christ Redeemer Statue and Sugarloaf Mountain in Rio de Janeiro, Brazil

A now-famous line from the Economist stated that, when analyzing the Brazilian economy, “the harder you stare, the worse it looks.” The Latin American giant is now in the throes of its worst recession since the Great Depression, with its economy expected to shrink as much as 3 percent this year. The ratings agency S&P added insult to injury on 9 September when it downgraded Brazil’s debt to junk status. And President Dilma Rousseff’s approval rating stands at just 8 percent amidst the far-reaching Petrobras scandal, implying that her popularity is now comparable to that of sexually transmitted diseases and the ‘New Coke’.

For its part, the Rousseff government wants to avoid any accusations of idleness amidst the chaos. On 14 September Brazil’s finance minister announced a US$ 17 billion austerity program that calls for equal amounts of spending cuts and tax rises. And investors are increasingly calling a bottom on the Brazilian free-fall. Amidst a 38 percent drop in the real’s value against the US dollar this year, with a near-identical decline in the BOVESPA stock market index, value and ‘vulture’ investors are now fishing for bargains. Many multinational companies and private equity firms are also using the opportunity to take their Brazilian subsidiaries private or acquire assets at depressed values. Presently the country’s interest rates are higher than Venezuela’s, and its bond spreads are actually on par with Argentina’s. Investors are beginning to ask whether this is truly warranted – or a strong buying signal.

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