Thread by @GlobalFinData

At about $1 tril, Brazil’s stock market is among the 20 largest stock markets in the world, equal to about 1/2 of the country’s GDP. The 1st stock exchange opened in Brazil in 1817, the Rio de Janeiro Stock Exchange opened in 1820, and the Sao Paulo Stock Exchange opened in 1890.

Brazilian stocks began listing in London in 1825 when three Brazilian mining companies took advantage of London’s interest in South America to list their shares. Between 1825 and 1985, 65 Brazilian companies listed in London.

It is difficult to provide an accurate, long-term stock index because of the inflation that wrecked the economy in the late 1900s. 1967-1994, Brazil went through 5 currencies and inflation averaged over 182% per annum, with inflation exceeding 1000% each year between 1988-1994.

In February 1990, interest rates hit a daily rate of 3.626%, which works out to over 790,000% per annum. The debt market for bonds and bills became almost non-existent. Brazil was finally able to tame its inflation addiction in 1994 when it replaced the Cruzeiro with the Real.

As a result of decades of inflation, it took 2.75 quintillion (2,750,000,000,000,000,000) reis of the 1800s to obtain 1 real of money today. Even since the currency was stabilized in 1994, the stock market has continued on a roller coaster ride.

How could an economy or stock market function under such circumstances?
Brazilian stock index data is available since 1954 when the SN Index which used companies from both the Rio de Janeiro and Sao Paulo stock exchanges was introduced.

An index for Rio began in '55 and the Bovespa index from Sao Paulo starts in '68. Since Brazilian stocks have traded on the LSE since 1825, we can calculate an index of London shares and append this index onto the Bovespa to create an index of Brazilian shares from 1825 to today.

Among the more prominent Brazilian companies that listed in London were Brazilian Traction, Light and Power Co. (later renamed Brascan), which existed between 1912-97, the General Mining Association, which existed between 1825 and 1900, the Rio de Janeiro City Improvement Co-

-which listed from 1862-1930, the Sao Paulo Railway Co, which existed between 1883-1969, St. John d’El Rey Mining Co. which listed in London between 1830-1969, and Leopoldina Railway Co. which listed between 1899 -1952 and inherited railway lines that converged on Rio De Janeiro.

Brazilian stocks made little progress until the 1950s. There was little capital appreciation in Brazilian stocks between the 1830s-1940s, and in some ways, this result was not unexpected. Between the 1820s-1940s, the index relies upon Brazilian stocks that were listed in London.

Brazilian stocks that listed in London provided a total return of 7.13% of which 1.50% came from capital gains and 5.6% came from dividends between 1825 and 1950. Without the dividends, investors would have received little in return from their investment in Brazil.

Between 1824-1968, government bonds returned 5.81% while stocks returned 7.28% providing an equity premium of 2.07%. It is difficult to measure the long-term equity risk premium after '68 because no risk-free instrument existed in Brazil’s hyperinflationary environment.

With interest rates exceeding 3.6% a day or 790,000% per annum, it's not a question if you're going to get money back, the question is how much? No long-term bonds existed 1968 to the '90s when US Dollar Brady Bonds were introduced. Real-based bonds were introduced in the 2000s.

You can calculate the equity risk premium before 1968 and after 1994, but not during the period of hyperinflation.
If you can’t even predict the inflation rate over the next month, how can you predict the inflation rate, and thus the yield on bonds, over a 5- or 10-year period?

Consequently, there are no benchmarks to compare the return on stocks to any other asset. The whole economy is wrapped up in avoiding inflation. Dividends lose their meaning in a world of 1000% inflation so the total return index differs little from the price index.

Before 1994, the dividend yield in Brazil was usually under 1% as inflation quickly wiped out any increases in dividends. Inflation creates problems that investors in non-inflationary countries never have to think about.

If you look at returns to investors in a country such as the United States which rarely has had high inflation rates, you can see how returns after inflation sink when inflation hits double digits. What would happen if inflation hit quadruple digits?

We can measure the equity risk premium between 1993-2018 using the MSCI Brazil Index and the EMBI US Dollar Bond Index. Between 1993-2018, a bond investor would have received a 10.43% annual return while a stock investor would have received a 10.19% annual return.

Brazilian gov bonds outperformed stocks during the past 25 years. The historical data for Brazil can either be adjusted for inflation, or converted into US Dollars to eliminate the impact of Brazil’s hyperinflation.

But because changes in the inflation rate and changes in the exchange rate differ from changes in the stock index, measuring bull and bear markets is difficult. When the inflation rate is 1000% and you are looking for a 20% decline in the index to register a bear market-

-any misalignment between the stock index and the exchange rate can produce a bear market in US Dollars that didn’t occur in Brazilian Reais or Cruzeiros.There are periods of rapid stock price growth followed by a decade or more of no progress in the stocks price in US Dollars.

It is interesting to note that between 1971-1993, despite prices rising a trillion-fold in Cruzeiros, the stock index made almost no progress in nominal US Dollars. Even after you convert Brazilian prices into US Dollars, the market has gone through wild fluctuations.

The stock market increased in price 20-fold between 1966 and 1971 generating an 82% annual return, but the index was at the same level 22 years later in 1993 as it had been at in 1971. The market increased 40-fold between 1990 and 2007 generating a 25% annual rate of return.

Since '07, the Brazilian stock market has lost half of its value. At its bottom in '16, the market was no higher than it had been in '97. Between 1929-39, the Brazilian market lost 90% of its value providing one of the worst returns in the world during the Great Depression.

In short, Brazil is a place for market timers, and very adept market timers at that. If your timing is off, you will pay the price. In 2008 during the financial crisis, the Brazilian market declined by over 73%.