The Long View
We will run a two part weekly brief, this week and next.
Is this just another Brazilian cyclical phase, or is the tide actually going out on Brazil?
Practically everything is being seen as negative in relation to the BRL, and there has been no sign?of a break below?5.50 for USD/BRL.
All of the above, in a different time, could easily have been spun into a positive narrative, however, as a good friend was telling me a few weeks ago, 'it is very hard to raise interest in this country!'. I have adapted the language as some words are unprintable. Growth is around 3%, employment is high and trade balances remain healthy. But does it feel that way? Foreign investment is still coming, but in relative terms it is still below 15 years ago. But there is maybe something bigger at work here. We would suggest that in a deglobalizing world, the challenge for emerging markets is becoming harder, not just because of geopolitical concerns, but because a decline in multilateralism and global cooperation will force countries to make much tougher decisions about placing capital and who to partner with.
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In a deglobalizing world,?reduced access to global markets, disruptions in supply chains, and lower foreign direct investment will hurt some countries. As some developed economies shift toward protectionism (if Trump wins, tariffs could be increased significantly)?and regionalization, emerging economies may see declining exports and investment, alongside increased currency volatility and fluctuations in commodity prices. Brazil, as a huge commodity exporter so will no doubt be affected.
Additionally, technological decoupling and increased geopolitical tensions further complicate the situation, leaving emerging markets vulnerable to slower global demand and higher barriers to trade. The weakening of multilateral institutions, combined with rising protectionism, limits the support these countries can receive in navigating global challenges. These economic disruptions may also trigger social and political instability, making it harder for governments to manage the fallout from deglobalization. A counterpoint to consider is that over the past 50 years, the world has witnessed the emergence of more democracies and an unprecedented level of global connectivity. In theory, this should be advantageous for Brazil—facilitating greater international trade and fostering broader relationships. China's rise as an economic powerhouse has made it Brazil's largest trading partner, with trade volumes three times that of Brazil’s next largest partner, the United States. However, despite these opportunities, the current global climate feels unstable. Whether this is a product of relentless news coverage or a reflection of deeper issues is debatable. From the perspective of S?o Paulo, it may feel less precarious than regions like Ukraine, the Middle East, or Taiwan, though this may offer a somewhat optimistic viewpoint.
While Brazil may face short-term challenges, the medium-term outlook could present a different story. Growth may slow, but improving investment conditions and debt management could make Brazil more attractive to both foreign and local investors. One thing seems clear: as global capital becomes increasingly selective in choosing investment destinations, Brazil—and indeed every nation—must work to enhance its appeal and create conditions that stimulate domestic investment and economic growth.
The uncertainty surrounding inflation, interest rates, and debt is reflected in the weakening local currency and waning confidence in the current administration’s next two years. This sentiment could persist until the next election cycle. Should 2025 bring higher inflation and slower growth, Brazil’s economic tide may continue to recede. Those benefiting from double-digit interest rates will likely see continued gains, opting to keep their capital passive, earning substantial returns in the bank rather than investing in businesses and opportunities.
The tide has receded in countries like Venezuela, Argentina, Iran, and others, and reversing such declines can take years, if not decades. In today’s uncertain environment, a straightforward approach is advisable. Avoid betting on unlikely outcomes—capitalize on opportunities when they arise, but in the meantime, choose currencies, assets, and investments that allow you to sleep soundly at night.