Why is Brazil doing so well in the current geopolitical climate?

Since 1980, the Brazilian economy has consistently underperformed compared to other LatAm markets, but the end of July may be showing promise of returning to the glory days. With workers often striking and a questionably inefficient public sector – Brazil often struggles to keep afloat financially. It seems that 2018 has been the year of buoyancy for the brasileros. In the rubble of the current trade conflict – Brazil may re-establish itself as the captain of Latin American markets.

001

Since Trump declared a trade war with China, Brazil has found itself in a strong position. Seeking alternatives, the Chinese have begun trading with Brazil to fill the gap left by sanctioned American supplies, which have been taxed by up to 25%. Should they continue to build this trade relationship, Latin American emerging markets could profit significantly – with Brazil at the spearhead.

Brazilian stocks have been rallying as their domestic political environment improves and they take the mantle as a primary beneficiary for the U.S.A.’s trade war with China. The Bovespa Index has since jumped 12% during the past month while the iShares MSCI Brazil Index ETF has also risen by 12%.

As exportation makes up a mere 13% of the Brazilian GDP, they are relatively unaffected by external events. However, they still remain the largest exporter of food, soft commodities, and minerals – coincidentally, the same exports that China previously bought from America. These two aspects should be seen as the reason China would turn to Brazil – a somewhat stoic economy with expertise in exports that the Chinese have been deprived of. Because of this, should the Chinese decide to continue trading with Latin America, the Brazilian GDP will most likely prosper.

Peter Donisanu, an investment strategy analyst at Wells Fargo Institution, has claimed that there is an improvement in risk sentiment across emerging markets and Brazil is piggybacking off of that. He continues arguing that recent easing of trade tensions between the U.S. and some of its key partners has improved sentiments around emerging markets, and consequently, Brazil.

While there has been an improvement in risk sentiment, as Donisanu claims, LatAms sudden boost seems to be directly correlated to recent political events, and it would be a large coincidence to say otherwise. While Brazil most definitely is piggy backing off attitudes towards emerging markets, their disproportionate boom should be attributed to the Chinese interest – not a general interest.