Belief in Brazil’s domestic miracle

Domestic consumption drives Brazil’s GDP as its large population becomes more prosperous, making the country the world’s tenth largest economy and the focus of JP Morgan Brazil.

But there are risks to the growth miracle. Given the importance of companies such as Petrobras and Vale to the economy, a sharp retreat in commodity prices would undoubtedly take its toll. Even with the limited weightings to these stocks in the MSCI Brazil 10/40 the index fell 60% peak to trough after the oil price crash in 2008.

Furthermore, the government has to wrestle with the immediate problem of inflation. Consumer price inflation, measured by the IPCA index, hit 5.91% in 2010, its highest rate since 2004. Inflation concerns have increased pressure on the central bank to raise interest rates but there are also fears over the use of capital controls by policymakers to try to contain the appreciation of currencies such as the Brazilian real.

“With the election of Dilma Rousseff to the presidency we feel reassured by the continuity on the political side,” says Whiting. “Brazil is becoming much more robust. It has done much better than countries like Russia in diversifying its economy.”

Brazil seems set to remain championed by the investment community. Its allure is underlined by the fact that foreign investors have somewhat counter-intuitively lauded the government for bringing in a 2% tax on foreign portfolio investments in 2009 as responsible financial management.

Nevertheless, it is a credit to Luiz Inácio Lula da Silva, who stood down as Brazil’s president on January 1, that the country is ranked among the great success stories of recent decades. The key to building on his legacy will be to ensure that enough money is spent improving the country’s infrastructure and social projects.