Best Gold Stocks to Buy Now: AABB, GOLD, GDX 
The government's effort on fiscal austerity is surely an essential step to restoring the confidence of investors. However, in the medium term (next 2-3 years), the government successfully restoring the fiscal house or improving investor confidence is unlikely. Achieving fiscal objectives is very difficult in a contracting economy and, clearly, the government does not have the fiscal room to initiate an investment cycle to help the economy grow.
The government's best option seems to be the difficult path of rebalancing - by focusing on fiscal savings even at the cost of letting growth suffer and by letting the currency adjust to a new level even at the risk of stocking higher inflation in the near term (say 2016 and to some extent 2017). This will continue to raise the upside risk to the Selic rate irrespective of the BCB's stance of holding rates unchanged. The financial market movements have not left the policymakers with any other option except adjustments in the fiscal and external space.
The positive side of this painful adjustment is the increasingly likely chance of regaining the lost competitiveness on the external front. As the chart shows, the manufacturing sector contributed over 15% of GDP and nearly 55% of total merchandise exports until almost 2008, when the sharp appreciation of the BRL (2009 onwards) and the real effective exchange rate led to a collapse in the manufacturing sector's growth and competitiveness.
"We have been saying for quite some time now that in the absence of reforms in the labour market, the only way to achieve external competitiveness was via the currency depreciation. In that respect, heavy BRL depreciation can probably lift production and exports from the manufacturing sector and also help start a mild investment cycle in the medium term. While the real exchange rate index has not depreciated as much as the USD/BRL, we estimate that with the September decline the REER has moved back to early 2005 levels", says Societe Generale.
The above expectation is not risk free as the external demand environment remains challenging. In particular, Brazil's export growth strongly depends on Chinese growth and the possibility of a further Chinese slowdown could nullify most of the gains from the real depreciation. It may be argued that the gains in the manufacturing sector - through currency depreciation - will not be affected much as the impact of the slowdown is predominantly felt in the commodity exporting sector. Brazil manufacturing can also gain share in the US and European markets. Nevertheless, the Chinese slowdown could potentially affect global demand growth and could be the key challenge for a medium-term recovery in Brazil's external demand.
