A stock picker's economy

Overview

At the outset of Lula’s second term, the prospects for Brazilian economic performance are like the glass that is half-full or half-empty depending on perspective. On the one hand, Brazil will fail to take full advantage of the historic opportunity created by the present phase of globalisation, with GDP growth rates remaining modest relative to emerging market peers. The blockages are mainly due to government policy failings - including inadequate infrastructure, now becoming a major constraint on growth potential.

On the other hand, the economy is resilient. The Lula administration remains committed to the macro framework of inflation targets, a floating currency and a primary surplus. Above all, the country’s supply-side strength in the form of dynamic private companies will keep the economy bowling along. Sectors geared to exports and domestic demand are well positioned to exploit, respectively, continued commodity price strength and falling domestic interest rates. Now that Lula has put the economy onto autopilot, and drifting into looser fiscal policy, this accentuates the shift of investment focus away from local debt and currency and towards equities.