Brazil's stock market, as measured by the inflation-corrected Bovespa index, has more than quadrupled in value since President Luis Inacio Lula da Silva's first election victory in October 2002, and is now at almost twice the peak achieved in 2000.
In comparison, the inflation-corrected Shanghai Composite only doubled during this period, while the US market, as measured by the inflation-corrected Standard and Poor's 500, increased only 50 percent. Indeed, the US has never experienced a fourfold increase in stock prices in less than five years, even during the late 1990s bubble.
Given that Lula is an avowed leftist who counts Venezuelan President Hugo Chavez and Cuban President Fidel Castro among his friends, Brazil's performance is all the more surprising.
How could he manage to preside over such a spectacular stock-market boom? Are Brazilians too exuberant? Might it be time for foreign investors to pull their money out?
Stock-market movements are certainly hard to explain, but there are reasons to believe that Brazilians might be rationally exuberant. Corporate earnings in Brazil have gone up roughly as fast as stock prices. With the price/earnings ratio remaining stable and moderate, the stock-market boom does not appear to reflect mere investor psychology.
On the contrary, the real question is why the increase in stock prices has not outpaced growth in corporate earnings. After all, in the 1990s, the US stock-market surge (as in many countries) was fueled by record-high price/earnings ratios.
In 1998, the price-earnings ratio in the US was 24, compared to a historical average of around 15. By contrast, the run-up in stock prices in Brazil started from a very different point, with the price-earnings ratio as low as six in 1998.
When a stock-market boom reaches historic proportions, a story always develops to rationalize it. The news media typically present reasons to justify the view that the economy has entered a "new era." Sometimes the stories are mere fabrications to validate market optimism, as with the 1990s boom. But, at other times, the stories seem more solid.
Lula has called this a "magic moment" for the Brazilian economy. While such words merit caution, economy fundamentals bear them out. The currency, the real, has been strengthening steadily, to nearly twice its value against the US dollar in October 2002, when Lula was first elected.
Inflation and interest rates are falling, the country is running with a trade surplus, foreign investment is flowing in at a high rate, and the government has more than paid off its debts to foreigners, becoming a net creditor to the rest of the world.
So stock investors seem to be recognizing Brazil's economic vitality, carefully watching corporate earnings rise, and running with them. After being lone believers through 2002, Brazilian stock market participants are now finding that investors from all over the world want to join the party.
Nevertheless, given corruption scandals involving prominent government figures that have come to light over the past few years, it is natural to wonder why the stock market has remained so strong.
Why haven't the stories of corruption caused a crisis, as similar scandals in South Korea and Malaysia did during the Asian financial crisis of 1997? Indeed, while the scandals have shaken the government, Lula was reelected last year, and investors continue to pour money into the stock market.
One reason is that the scandals have provided an opportunity for investors to see Brazilian freedom of speech and democracy in action. Newspapers and television commentators have been relentless in reporting the scandals, helping to prove to Brazilians and foreign investors alike that the political system is sufficiently stable to withstand open criticism.
Lula remains popular with Brazilians because his populist rhetoric shows real sympathy with the less affluent, and with foreign investors because he has always tempered his radicalism to accommodate economic reality.
He recently criticized Bolivian President Evo Morales' threats to seize foreign assets for his failure in this regard.
"Radicalism is incompatible with the common sense needed from someone who governs," Lulu said.
That combination of philosophical radicalism and economic pragmatism has proven to be a perfect formula for Brazil's progress.
Granted, the future is unknown; we have no crystal ball to predict the Bovespa's likely path. But, for me, the story is far more convincing than the one told during the 1990s stock-market boom.
Robert Shiller is professor of economics at Yale University.
Copyright: Project Syndicate
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