There has been a very big ongoing disconnection lately between stocks and the real economy in Brasil. If in on hand we have seen stocks making new highs (nominal in BRL) and business confidence improving, on the other hand jobs, industrial production and IBC-br, a gauge for the GDP, seems to all have stalled. We could discuss if prices and expectation leads the economy or the other way around, and in fact looking for the historical data both things happen. Sometimes expectations and stocks are high and lead, sometimes not, specially if we add political risks that strongly affect how the economy will be five or ten years form now, which pretty much seems to be the case right now with the pension reform still ahead in the pipeline. The reform (or not) could affect future prices and the economy in many ways. Country risk (and CDS) could sky rocket affecting the currency, treasury rates, corporate funding, depressing investments and so on if not approved. On the other side if approved we could see real long term rates falling to levels never seen, more credit, industrial and residential investments and etc etc etc...
So here we stand at this binary situation. Stock markets are in some ways confident but the real economy seems to be just "waiting to see". The more the former proves right the later tends to follow feeding a feedback loop mechanism. This feedback worked for some time starting in 2016 until recently but now its losing some steam. Charts below show that clearly. Using a Diffusion index as a lead indicator its possible to see that both jobs and activity not just halted but could be heading south again if we don't have a very quick and strong sign of a meaningful reform.
...at the same time Ibov keeps it's trend of optimism not only fueled by the pension reform expectations but now also by a FED hiking pause that gave emerging markets assets and risk in general some relief.
Though Ibov is far from expensive if compared with both EM and DM in valuation and historical levels I suspect investors wont be complacent for so long if the prospects of the pension reform and the economy deteriorates further affecting earnings perspective. If we add to the picture US economy cycle probably at the later stages (as the inversion of part of the curve seems to shows) volatility will also increase down the road. Time is precious.
So here we stand at this binary situation. Stock markets are in some ways confident but the real economy seems to be just "waiting to see". The more the former proves right the later tends to follow feeding a feedback loop mechanism. This feedback worked for some time starting in 2016 until recently but now its losing some steam. Charts below show that clearly. Using a Diffusion index as a lead indicator its possible to see that both jobs and activity not just halted but could be heading south again if we don't have a very quick and strong sign of a meaningful reform.
...at the same time Ibov keeps it's trend of optimism not only fueled by the pension reform expectations but now also by a FED hiking pause that gave emerging markets assets and risk in general some relief.
Though Ibov is far from expensive if compared with both EM and DM in valuation and historical levels I suspect investors wont be complacent for so long if the prospects of the pension reform and the economy deteriorates further affecting earnings perspective. If we add to the picture US economy cycle probably at the later stages (as the inversion of part of the curve seems to shows) volatility will also increase down the road. Time is precious.
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