What happened
It was a rough week for Brazilian markets, and Azul (AZUL -3.62%) got caught in the downdraft. Shares of the company were down 18% for the week, as of Thursday afternoon, on fears the airline's home economy might be headed into a recession.
So what
It's been a tough few years for airline stocks, and Latin American carriers have been hit harder than most. But Azul has flown through the pandemic relatively unscathed, and just a few months ago, investors were bidding the shares up on hopes that Azul might be able to acquire a rival out of bankruptcy to help build its market share in Brazil.
Image source: Getty Images.
But the airline can't fly above events on the ground, and Brazil has recently been a dangerous place for investors. The country was slow to respond to COVID-19, which led to a stalled recovery this summer. And this week, Brazilian assets were under pressure on talk that the nation's government would breach its spending-cap rules.
There's fear that should Brazil's spending spiral out of control, it would send the nation into a recession. This would reverberate throughout the economy and stunt growth for Azul and other airlines. A number of stocks on the Ibovespa Brazilian index were down for the week, including Azul.
Now what
Even with the recent declines, Azul shares are up nearly 20% year to date. The airline still looks like one of the best investments in the South American sector, but this week is a reminder of how difficult it can be for the stock to gain altitude.
There's a lot of promise in emerging-market transport stocks, with a growing middle class expected to take to the skies in record numbers in the years to come. And Azul has a strong track record of being a top operator in the region.
But until Brazil recovers, there can be no full recovery of the country's airline sector. Investors who bought in for the long haul should keep their seatbelts fastened during weeks such as this.
