Brazil remains relevant
Benefits of a huge internal market and being highly cost competitive in the production of a number of soft commodities are significant advantages and, due to the abundant natural resources and forward action, Brazil’s energy mix is also much greener than the majority of other countries. Additionally, the country is developing truly world-leading technologies. It remains an economy that commands worldwide importance.
Lula has long been a man with ambitions for himself and for his country to be seen on ever-bigger stages, to have a seat at every table. As the leader of Brazil, he wishes to be a global leader so we could see free trade agreements, conspicuous presidential visits and reciprocal arrangements. Lula has spoken openly since the election about wanting to make a contribution to the “construction of a peaceful world order based on dialogue, the strengthening of multilateralism and the collective construction of multipolarity”. It is hugely positive that foreign policy looks set to be much more open and active again now, which could improve the outlook for foreign direct investment and future growth.
Investing in Brazil
Brazil’s equity market is notoriously as volatile as its cities are vibrant. The Ibovespa Index is concentrated in a few large-cap names in the energy and banking sectors which dictate direction and are high beta to external factors such as commodity prices, China’s fortunes and movements in the dollar (negatively correlated). However, this tells nothing of some of the home-grown quality companies that can get lost under the index heavyweights. While right now the domestic story on Brazil is less than optimal, expectations have been extensively reset among many of the high quality, growth names we look at. Historically, since 2000 Brazilian equities have returned an average of 20%5 during easing cycles, with the materials sector most positively geared to the upside.
For now, in the Polar Capital Emerging Market Stars Fund we have a slight underweight to Brazil. We own three long-term businesses with fundamental attractions across the technology, healthcare and financials sectors and keep a watchlist of other quality-growth companies that stack up against our existing portfolio and under our investment process. We have exited any names that were not true leaders in their industries or where we saw any sign of financial vulnerability given the economic environment – these were the biggest takeaways from the time spent on the ground in Brazil meeting companies.
It was clear from these meetings that management teams’ investment appetite to spend is just that bit more cautious, costs are being watched more closely to preserve or grow margins and the heady days of growth at all costs are behind us in favour of balancing profit.