Conclusion: All told, we continue to remain favorably disposed to the Brazilian consumer, which is being supported by a significant confluence of tailwinds. We are, however, not currently invested in Brazil at this current juncture, as the outperformance looks to be in the rear view for the immediate term.
Consumer Credit Demand Falls in October, though Still Robust
Credit analyst agency Serasa Experian reports the number of consumers seeking credit fell 3.2% MoM in October, after setting a record in September. Experian says this decline does not represent a shift in the trajectory of consumer credit, as it is primarily a calendar effect because of the observance of Children’s Day in September, and because October had two fewer business days. Year-over-year, demand for consumer credit was up 15.2% in October and up 15.7% YTD, versus the year-ago period.
Brazil’s Relatively High Cost of Living
A report in O Globo finds common articles in Brazil can cost as much as six times as much as in other countries. Examples include PlayStation 3, which costs R$ 2,000 in Brazil, four times the US price of US$300 (R$ 510).
A comparison of automobile prices found the Toyota Corolla XEI costs R$ 75,000 in Brazil, versus the equivalent of R$ 58,740 in South Africa, R$ 33,782 in Japan, and R$ 32,797 in the US. Consumer advocates say this is largely attributable to high taxes and import duties, as well as to a corporate culture of maintaining exorbitant profit margins.
We think there may be significant market inefficiencies at work, as the O Globo report notes the nation’s consumer market is still evolving and lacks broad reference prices. Also, there is still a cultural bias that foreign manufactured products are more luxurious than domestic manufacture. Brazilians have a penchant for buying certain items overseas – even paying the 50% duty to bring in items over the US$ 500 personal limit on dutiable purchases.
Vehicle Production Rises, Sales Fall
Brazilian auto manufacturers produced 321,800 vehicles in October, 5.5% higher than September and up 1.5% over last year. Sales for October fell 1.3%, to 303,200 units, which is still 3% higher than October 2009.
All told, we continue to remain favorably disposed to the Brazilian consumer, which is being supported by a significant confluence of tailwinds. Brazil’s unemployment rate fell 50bps MoM to a record low in August, coming in at 6.2%. Average real incomes also increased +1.3% MoM and +6.2% YoY and the latest data (April-July) show Brazilian consumer borrowing rates are at the lowest level since 1995 (6.74% per month).
We are, however, not currently invested in Brazil at this current juncture, as the outperformance looks to be in the rear view for the immediate term. As of the end of last week, the six largest Brazilian retailers had P/E ratios that were over 3x those of the underlying Bovespa Index, suggesting there is some mean reversion to be had to the downside.