Brazil’s stock market rises from the dead. What now?

While economists debate on the shape that the post-pandemic economic recovery will take, there is one aspect where all signs point to an ideal V: Brazil’s stock market. In the first month of the pandemic, Brazil’s benchmark stock index Ibovespa fell by half, but has already clawed its way back to around 90,000 points, 20-percent below its all-time high — buoyant figures considering the magnitude of the pandemic. Volatility continues, but investors are measuring the fundamentals behind this rebound.

Looking at the most recent data about the real economy in Brazil, such as the worst drop in retail sales and industrial output on record, or the grim GDP projections — with contractions potentially reaching up to 9 percent, depending on the variables factored in — the stock market’s swift recovery seems disconnected to the current scorched-earth scenario. But local fund managers heard by The Brazilian Report warn that the full picture is more complex than the immediate profit perspectives for Brazilian companies — which are definitely poor in the short term — and involve Covid-19 developments, bargain purchases, excess liquidity, and global trends.

To understand Ibovespa’s almost miraculous recovery, first we need to take a step back. 

During the worst moment of the crisis yet, between March and April, Brazil’s stock exchange was among the worst performers in the world, a freefall that was even steeper in USD due to the devaluation of the Brazilian currency. But even as markets recover worldwide, the bounce in Brazil seems to be more timid than in the U.S., where Nasdaq has already hit all-time highs despite the poor economic prognosis.

According to Patrick O’Grady, chief executive officer at asset management firm Vitreo, the numbers show that Ibovespa has been following a global pattern. But he also adds that, while indexes are used as a general measuring stick for stock markets, they do not necessarily represent the performance of all stocks, nor the real economy.

“This difference between the indexes and companies’ market caps is because fewer companies have increasingly larger stakes in them. If you analyze the S&P 500 with and without tech companies, it is a totally different thing. And Ibovespa has always been even less diversified than that. It is also not a good snapshot of the economy’s performance, as it unites only the...