It’s shaping up to be a lousy year in Brazil. Social strife is rising, the central bank is raising rates to stave off resurgent inflation, and the country’s leading export market—China—is pulling in fewer imports. No surprise that investors are heading for the exits, with Brazil’s Bovespa stock market index down roughly 25 percent in 2013.

The sharp drop in Brazilian stocks is starting to catch the eye of value investors. “We had been cautious on emerging markets in general, and Brazil in particular,” says Alec Young, S&P Capital IQ’s global equity strategist. “But with better valuations in place, we’re becoming much more constructive.”

Brazilian stocks weren’t especially pricey when the year began, and the subsequent plunge has opened a widening gap in terms of relative valuation. Analysts at JP Morgan note that Brazilian stocks trade at 8.6 times projected 2014 profits, compared a multiple of 14 in the U.S. and 16 in Mexico, Latin America’s other major economy.

The Mexico analogy is apt. Ed Kuczma, an investment analyst who follows emerging markets for Van Eck Global, believes that over the long term “you’ll see higher growth in Brazil over Mexico, in part because consumer spending forces in Brazil will be more powerful.”

But the outlook for 2013 remains challenging as Brazil deals with a stubbornly high 6.5 percent inflation rate. A hike in interest rates is the only readily available tool to curb inflation, but rate hikes are actually a positive for many investors. “Higher rates give credibility in the inflation fight, which is important for global confidence,” Young says.

Also of concern for investors is the government’s heavy hand when it comes to taxation of resource-focused multinationals. Oil giant Petrobras, for example, has proved to be a poor investment in recent years in part due to periodic massive tax levies that caught investors off-guard. Petrobras may also be facing a further $3 billion tax bill to resolve a dispute regarding asset sales that took place a decade ago. (The company recently obtained an injunction to allow for further judicial review).

In the power generation sector, leading Brazilian utilities such as Companhia Energética de Minas Gerais S.A saw their share prices plunge last summer when the government mandated deep price cuts in power prices.

Two Brazils

It’s crucial to distinguish between the two pillars of the Brazilian economy: commodity exports and domestic consumption. While Brazil retains its role as one of the most dynamic global producers of natural resources, slumping commodity prices imply a down year for many major exporters such as Vale. “Until China rebounds, Brazilian exports are likely to remain under pressure,” says Van Eck’s Kuczma.

Investors need to pay attention to the domestic economy, which remains a solid long-term growth story. “There has been an ongoing trend towards wealth creation across all social classes,” says Bruno del Ama, chief executive officer at Global X Funds. “The purchasing power keeps on expanding, which is generating very positive long-term dynamics.”

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