Increases in exports of soy beans and iron ore helped China overtake the US as Brazil’s largest trading partner.
But the strength of the link with China may not help Brazil during 2010 as the Chinese tighten their monetary policy and rein in their levels of commodity stockpiling. Brazil is commodity-rich and self-sufficient in oil so the fortunes of its economy are intrinsically linked to commodity prices. A price decline in commodities, widely expected during 2010, will do nothing for the Brazilian economy.
The Bovespa index of Brazilian equities has a 17% weighting to the energy sector and a 32% weighting to the materials sector, which gives some indication of the reliance of the economy on its commodities.
It is election year in Brazil and not only are Brazilians electing a new president (Luiz Inacio Lula de Silva is constitutionally unable to serve a third straight term), they also must vote for all 26 governors, all 513 members of the lower house of Congress and two thirds of their 81 senators.
Lula is and has been a popular president. His chosen successor (his chief of staff, Dilma Rousseff) is less so, polling only 17% of the electoral vote in December 2009 versus 38% for Jose Serra, leader of the opposition. Lula has backed Rousseff but has stated that if she does not win, he will stand again in 2014. Not entirely affirming. It is likely to be a closely fought contest but, as yet, there is no certainty over candidates, their economic policies or the political outcome. Uncertainty is not usually a background for strong stock market growth.
Brazil is a strong long-term growth story. It will host the football World Cup in 2014 and the Olympics in 2016. There are many positives. But its reliance on commodities and the uncertain political backdrop, on the back of one of the biggest equity bull runs in recent times (the Bovespa index rose 83% during 2009) may dampen the party atmosphere when the Rio carnival concludes next month.
Caroline Shaw is a fund manager at Courtiers.
