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Despite bleak forecasts for the economy, Brazilian stocks have garnered strong gains recently. In fact, investors are hoping that times will get tougher for the economy so that a turnaround is finally affected. Such expectations may seem contradictory at first, but the evidence is overwhelming.

Spectacular Rise of the Real

The country’s currency increased 0.8% to 2.2189 per dollar today, which marks a five-month high. The gain was the largest among several major currencies. At the same time, the benchmark Ibovespa stock index gained 2.1%.

What was of particular interest was the reason behind the increase. According to a poll President Dilma Rousseff’s popularity underwent a steep decline, falling to 38% from 44% in February. The results imply that Rousseff may not be relected.

The fact that this is not an isolated incident is borne out by a similar occurrence in the past.  When Rousseff’s ratings declined for the first time since July according to a poll whose results were released on March 27, the real gained 1.9%. The president’s popularity had dipped to an all-time low due to street protests.  

Economic Concerns

A decline in economic growth accompanied by high levels of inflation has caused severe distress to the nation. Additionally, the current administration has been accused of economic mismanagement. Rising food prices and fears of an increase in unemployment are some of the major economic concerns.

Possible energy shortages are also weighing on the populace. Unwarranted interference in the affairs of state-owned firms has significantly reduced their market value. Meanwhile, a weekly central bank survey of 100 economists has reduced the median growth forecast for the current year to 1.63% from 1.69%.

Increase in Interest Rates

Last Wednesday, interest rates were raised for the ninth consecutive time. This is a continuance of the monetary tightening of the central bank in an attempt to control surging food prices. The fact that this is election year is particularly important as food prices increase inflation which is already high.

Given such overwhelmingly negative factors, why is the stock market rising? On March 1, the Bovespa market index, which had lost 30% over the last two years changed course. Since then, the index has gained in excess of 10%.

One reason could be that the series of rate hikes may be ending. When it raised rate on April 2, the central bank changed the language of its statement. Removing earlier indications that it would continue with the cycle of rate hikes, it said it had decided to increase the rate "at this moment."

Several analysts believe that the bank could change its policy of monetary tightening. With growth already at a low, increasing interest rates can only push it lower. A change in policy is necessary for an economy stagnating for nearly three years.

Positives Remain

There may be several negatives in the short term, but Brazil remains an important investment destination. Endowed with large natural resources and a skilled workforce it has the potential to grow its exports significantly. More importantly, Brazilian stocks are still trading at low prices and offer great value to investors.

President Rousseff could well win the reelection. But the message from markets and populace alike is loud and clear. The next administration would probably pursue a very different set of economic policies.

Below we present three Brazilian stocks which possess the potential to grow appreciably, each of which also has a good Zacks Rank.

Companhia Energetica Minas Gerais

Companhia Energetica Minas Gerais
(CIG - Analyst Report), also known as CEMIG, is a holdings company whose primary operations are related to the electricity sector. It also has interests in the telecom and natural gas industries. The company has several subsidiaries, such as Cemig Distribuicao SA which distributes electricity.

CEMIG holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 10.60%. The forward price-to-earnings ratios (P/E) for the current financial year (F1) is 6.57.

Companhia Brasileira de Distribuicao

Companhia Brasileira de Distribuicao
(CBD - Analyst Report) is a retailer of food, home appliances, clothing, drugs, fuel and other products. The company utilizes various store formats to distribute its products and owns several brand names. It has four major divisions, retail, cash and carry, e-commerce and home appliances.

Currently the company holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 18.90%. It has a P/E (F1) of 20.60.

Banco Bradesco S.A.    

Our third choice is Banco Bradesco S.A. (BBD - Snapshot Report). This Brazilian bank has a wide range of financial products and services targeted at individuals as well as corporate customers. Its range of operations includes investment and international banking. The bank operates within the country as well as in foreign nations and has several subsidiary companies.

Apart from a Zacks Rank #2 (Buy), Banco Bradesco has expected earnings growth of 10.64%. It has a P/E (F1) of 10.50.

A change in the economy looks imminent and this adds to the value proposition of Brazilian stocks. These three picks can leverage the country’s vast potential and would make good additions to your portfolios.

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