By Mark Mobius
Franklin Templeton Investments
Via ValueWalk
Mark Mobius, photo courtesy of Templeton Asset Management
As long-time investors in Brazil, the recent presidential election has been of keen interest to us. One can certainly say it’s been an interesting race! The market had been volatile based on the changing polls leading up to the election; there were hopes that new leadership would ignite a positive new direction for Brazil’s economy, which hasn’t experienced the type of economic boom many (including us) had hoped for—and believe is possible. After a particularly close race, incumbent Dilma Rousseff emerged victorious and Brazil’s stock market, at least initially, didn’t seem to like the result. This isn’t really a surprise, as many investors, frustrated with the direction of the economy and the business climate there, were clamoring for change. We hope that Rousseff can now follow through and deliver positive changes, not just promises.
Seemingly recognizing the stock market’s potentially negative reaction, in her post-election speech Rousseff stated that one of her first tasks would be to overhaul the political system, with the intent to reduce corruption. She also pledged to engage in a more open dialog with her critics. Heavy bureaucracy and alleged cases of corruption (particularly among state-owned companies) are big problems that we think warrant attention. The bottom line, as reflected in the debate leading up to the election and the particularly close result—Rousseff received just over 51% of the vote—is that people want change. In our view, the degree of inefficiency and lack of progress with regard to reform is holding back investors and the country in general. Although we see some positive longer-term trends, recent macroeconomic indicators appear generally weak.
The unemployment rate is low, but that’s tied in part to shrinking labor forces; job creation has deteriorated due to losses in construction, manufacturing and transportation sectors. Industrial output was down over the summer, stalled in part by the World Cup events as many workers, and host cities, took holidays. While tourism swelled, the event came with a high price tag, and it remains to be seen if significant long-term structural or economic benefits will result.
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