No Confidence, No Gains

The Ibovespa—the main Brazilian benchmark—opened for the first day of trading on January 2, 2014, at 51.522 points and with dire prospects. The economy was struggling, public indebtedness was rising and there was a bout of inflation that brought concerns to the trading desks. The blue chips— Petrobras SA (SA:PETR4) and Vale do Rio Doce—had been punished severely as a result of the government mismanagement not only of the oil stated-owned company, but also of the economy as a whole. To make the situation even worst, the president Dilma Rousseff was expected to win the elections by a large margin.

The kickoff of Petrobras shares at 17,15 reais (approximately 6,35 dollars in current values) makes investors now regret any move toward those assets. The shares closed 28 November at 12,84 reais —25% below its opening in the first day of trading this year. Needless to say that macroeconomics has played a key role in holding back the stocks due to the crude oil prices and the decision made by the Organization of Petroleum-Exporting Countries (OPEP) in favor of keeping the level of production unchanged. The contamination is inevitable, but the mining company Vale do Rio Doce had its own reasons for losing so much market value.

Vale do Rio Doce shares opened for the first day of trading at 32,80 reais (approximately 12,11 dollars in current values). As a result of the continuation of the Chinese slowdown, the iron ore prices have fallen sharply, leading the mining company assets to close at 19,93 reais on 28 November—an astonishing 40% drop in relation to its opening for the year. Macroeconomics accounts for most of the trend, but investors’ general perception is also decisive for a better understanding of the downward trend. Investors don’t trust the Brazilian government so there is a sentiment that Brazil is a dangerous gamble right now.

The government keeps reinforcing this perception by altering the rules of the game at any time. President Dilma Rousseff announced a few weeks ago that would work around the clock with Congress to pass legislation aimed to exempt the federal government from the obligation of meeting the primary surplus goal of 116 billion reais. Clearly, the intent is to pass a bill with no clarity regarding what level of surplus is expected, allowing the government to save the amount of money it finds convenient.

The problem is that Brazil is facing a bitter combination of rising public indebtness that requires more and more money to roll over the debt, and a slowdown in the economic activity whose effect is less money from taxes flowing into the government accounts. The only way to close the math without altering the legislation is by rising taxes—which might be lethal for an economy that is so close to the recessionary territory. In addition to that, inflation remains a concern so the government is expected to continue raising the interest rate, what will cause comsuption to fall. Brazilians should expect rainy days ahead.

The Ibovespa is unlikely to recover from the recent losses as the government continues its delusional stance toward the actual conditions of the economy. By seizing the Congress in order to make sure president Rousseff be kept from severe penalties for not meeting the primary surplus goal, the government makes clear that it has the votes to pass any legislation. The Brazilian stock market will no hesitate to price in all these variables.