Brazil – Equities for the right reasons

Too many in Brazil now advocating buying domestic equities because “yields collapsed!” (for brazilian standards!)

Low real sovereign yields certainly lower the opportunity costs, but if low real yields exist because there’s no real growth or even nominal growth… it sucks.

Cases in point are Japan and Germany in the past 2-3 decades.

Yields collapsed but equity total returns in local currency have been quite shitty from extended valuation tops when yields are very low and declined further from there too.

In Germany yields collapsed, then collapsed some more.. and from 2000’s peak.. MSCI Germany delivered like < 2%/yr in nominal returns. Bunds? Over 10%/yr.
In Japan since 1989 bubble peak.. MSCI Japan delivered a net loss. JGBs? Decent real returns.
Reasons vary, from demographics to zombie companies to desinflation, etc.

Brazilians should focus on buying domestic equities not because the hurdle is low, but because country will deliver (I strongly believe) better-than-seen real growth, positively impacting corporate earnings, employment, productivity, etc. Surviving companies already cleaned up the mess they went through from 2011-2016.

I’m bullish because there’s huge slack in employment and capacity utilization, cleaner balance sheets, government with tight purse, reforms, deepening capital markets and, of course, low allocation to equities after 10-11 yrs of equities going nowhere.

Two charts of Germany x Bunds yields and Japan x JGB yields:

Germany

Japan

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