Fund selector: A contrarian look at Brazil
The renowned investor Sir John Templeton is quoted as once saying: “If you want to have a better performance than the crowd, you must do things differently.”
So when looking for something different, perhaps contrarian, the obvious place to explore is emerging markets, which have had a torrid time of late. Few more so than Brazil, which is going through a great period of stress and uncertainty.
Its currency is trading at a multi-year low, inflation is at 10 per cent, a corruption scandal is engulfing state-owned Petrobras, its largest trading partner China is ‘slowing down’, and the natural resources market is being routed. As a result, its equity market is down almost 70 per cent over five years in sterling terms.
Negative sentiment towards the equity market is being driven by far more than corporate fundamentals, with state-owned companies having been particularly sensitive to the political and economic environment.
The 2014 election success for Dilma Rousseff appears a distant memory and there was no obvious ‘honeymoon period’. Civil unrest is leading to calls for the impeachment of Ms Rousseff as her popularity sinks to new depths.
The perception had been that Ms Rousseff had overseen an anti-business administration that created distortions in the economy during her first term, which is why few commentators had predicted a second term.
Joaquim Levy, a former treasury secretary under previous president Lula da Silva, was appointed as finance minister in an attempt to appease the markets. But his policies appear to have had little short-term success, despite efforts to restore Brazil’s public finances and implement a return to more conventional economic policy.
In fact, Moody’s recently downgraded Brazil’s sovereign rating further to Baa2, but the fact it kept the outlook as ‘stable’ was treated by the market as a pleasant surprise. This is perhaps a tentatively positive sign that much of the negative sentiment has been driven by political woes, rather than economic ones.
It’s worth noting that the local currency two-year government bond is yielding circa 13 per cent, reflecting the dislocation between monetary policy in Brazil versus much of the developed world.
However, putting the economic stresses aside, Brazil is home to many good businesses, and valuations on the main index are no longer an issue at just over 11 times earnings and a yield close to 4 per cent.
The weakness in the currency also presents a trade in its own right that is more palatable than it was previously, with a purchasing power parity metric suggesting it is now ‘undervalued’ against both the US dollar and sterling. The downside risks are gradually becoming less significant, although the health warning stamped all over this trade is that cheap can become cheaper.
Investing into a market with such a challenging economic backdrop habitually feels counter-intuitive, yet it can often be where the value lies. Investing in Brazil right now would certainly be a valid candidate for “doing things differently”.
James Sullivan is investment director at Coram Asset Management
