Brazilian economy is the real lure for the yield-hungry

Financial Times
By Jonathan Wheatley in São Paulo
Published: May 7 2009 03:00 Last updated: May 7 2009 03:00
The huge rally in Brazilian equities and currency over the past two months has left many analysts searching for convincing explanations.
The main São Paulo Stock Exchange Index, the Bovespa, rose from 35,000 points in early March to almost 52,000 points yesterday morning.
The index is up by more than 75 per cent from its low point last October, though still a long way from its high of more than 73,000 points a year ago.
Meanwhile, the real - which slipped against the US dollar from R$1.56 to R$2.48 between August and December - was trading at R$2.12 yesterday morning.
It recovered so quickly this week that the central bank started buying US dollars again for the first time since September.
"I've got to tell you, it's very confusing," said Alvise Marino, emerging markets analyst at IDEAglobal, a New York research firm.
On the one hand, the economic news coming out of Brazil - and indeed all emerging markets and the wider world - is really not that good.
Industrial production fell by more than 10 per cent year-on-year in March after three consecutive monthly falls of about 17 per cent.
Vehicle sales - a key indicator, which plummeted in December but had been recovering this year on the back of short-term tax breaks - fell again in April by 13.6 per cent from March.
Very slight recoveries in retail sales and consumer and business confidence are a long way from explaining investors' ebullience.
On the other hand, however, Brazil's prospects certainly compare well with those of other countries.
Its $200bn in foreign currency reserves provide a solid cushion against volatility and remove any threat of debt default.
Indeed, Brazil is a net creditor to the world and is preparing to lend money to the International Monetary Fund.
While the government's room for action on the fiscal side is constrained by falling tax revenues and rising spending on payroll, leaving little money for stimulus-inducing spending, it has plenty of room for action in monetary policy.
The central bank has been cutting its target overnight rate this year but at 10.25 per cent it is still very high and the bank is expected to go on cutting as inflation remains subdued.
Another explanation is that with real interest rates in the developed world round zero, investors who had been hoarding cash are once again looking for yield.
Overseas investors took more than R$26bn from the São Paulo Stock Exchange between June and January.
Since then, more than R$5.7bn has returned, including R$3.8bn last month alone.
"The US has been pursuing very aggressive, expansionary monetary policies and this has created a very strong increase in liquidity," Mr Marino said.
"Investors who were very averse to risk are now more comfortable about getting back into the market. The fact is that the Brazilian real remains the bellwether for international risk appetite."