The 2-Minute Thought: Brazilian stocks rally? What?!?

Source: stockcharts.com

Source: stockcharts.com

Has the world gone crazy or are Brazilian stocks really rallying?  It seems like it was just a moment ago that investors didn’t want to hear about Brazil, think about it, or certainly, touch it.  The economy is terrible.  The president’s facing impeachment.  And the ex-president just was implicated in the Petrobras corruption scandal. 

But surprise, surprise, the MSCI Brazil index is up 19% year-to-date (the chart above shows the iShares Brazil ETF).  Though Brazil has a long way to go, that’s a lot better than the S&P 500 (down 2.7% YTD as of this writing).  It’s also a lot better than the crushing predictions made about emerging markets’ prospects even a month ago. 

What’s different now is that commodities have rallied, giving emerging markets a glimmer of hope and investors a wakeup call after sleepwalking with the autopilot set to avoid emerging markets at all costs. 

The charges against former president Lula da Silva actually caused the market to surge further than they already had.   Perhaps it’s because Lula’s troubles make it more likely that current president Dilma Rousseff really will get impeached, which would be market-positive.  Or perhaps it’s the last straw, the final catharsis a market needs before it turns.  ‘How much worse could things get?’ the thinking goes.   Things may have gotten plenty bad enough.

Source: MSCI

Source: MSCI

Other emerging markets, especially in Latin America, are also doing far better than expected this year.   While this may or may not be the start of better days for them, the return numbers shown in the chart are a good reminder that the time to buy is when things are darkest and look ugliest.  Buying unpopular things is tough, but as Roger Ibbotson has said, the most popular kids in high school aren’t the ones who turn out to be the coolest adults.  If the investor’s job is to find what will improve more than average, remember that things with problems have a lot more potential to improve than shining stars.