Should investors steer clear of Brazil?
Are its political and economic woes a barrier for investing?
BY Jann Lee | May 11, 2016
For some investors, the country does offer opportunities. “Brazil, during this period of difficulty, presents a lot of value to us,” says Louis Lau, director of investments at investment advisory firm Brandes Investment Partners. “We see the earnings for many companies as depressed. . . A lot of the valuation has become very cheap.”
Brazil’s woes have been piling up with the country facing a recession and President Dilma Rousseff fending off efforts to impeach her. As early as this week, the federal Senate will determine whether Rousseff will undergo a trial that could lead to her ouster.
Despite the drawbacks, Lau remains confident that investments in Brazil will do well in the long run, noting that it occupies a large portion of Brandes Investment Partners’ emerging market portfolio.
The Canada Pension Plan Investment Board remains active in Brazil. At the end of 2015, the pension plan’s overall investments in the country totalled $2.5 billion, and in 2014, the CPPIB opened an office in Sao Paulo to oversee investments in Latin America.
“As a long-term investor, [we’re] able to see beyond the business cycle to find investments that provide significant returns over the long term,” said Rodolfo Spielmann, managing director and head of Latin America at the CPPIB.
Despite the optimism, Christine Tan, chief investment officer at Excel Funds in Mississauga, Ont., says investors should proceed with caution as Brazil lacks infrastructure and tends to be sensitive to inflation and changes in interest rates. But she says there are opportunities.
“I think it’s too early to make a Brazil-only call, but there is a compelling opportunity there,” says Tan. She advises people to diversify their portfolios among other Latin American countries such as Mexico, Peru and Chile.
Brazilian exporters lead with low currency
While Brazil’s overall economy is stagnant, exporters have an advantage because of the low currency with the current rate at 3.50 Brazilian real for every U.S. dollar.
Tan notes exporters such as pulp companies were already selling their products at low prices to begin with. Pulp, she adds, is especially lucrative because Brazil has the right climate to produce it.
Brandes Investment Partners, meanwhile, has invested in Marfrig Global Foods, a prominent beef producer that distributes meat products to large restaurant and supermarket chains in more than 100 countries.
“There’s been more trade agreements to allow the import of beef from Brazil, which is grass-fed as opposed to corn-fed in the United States,” says Lau. “The beef in Brazil is high quality, so it’s leveraged a positive export growth.”
Brandes Investment Partners also holds shares of Embraer, a Brazilian aerospace producer that manufactures commercial, military, executive and agricultural aircraft. Embraer suffered a setback after the 2008 financial crisis when demand for executive jets plummeted as companies scaled back costs.
However, Lau says the company’s diverse offerings have allowed it to profit from regional jets. “There’s been a demand for smaller planes flying shorter routes . . . because of the proliferation of discount airlines,” he says.
Will Brazil’s economy improve?
Lau suggests economic revival for Brazil may come sooner than expected. For one, Brazil is a large exporter of iron ore and is home to Vale, a global mining company.
Noting the recent recovery in oil prices, Lau suggests it may bode well for Brazil. “The environment for commodity prices is much more positive than it was before,” he says.
Brazil’s inflation rate has also started to decline from 10.7 per cent last year to 9.4 per cent in March 2016.
With Rousseff’s probable impeachment, there’s pressure on the government to reduce their expenditures and control spending, according to Tan.
Investors interested in Rousseff’s fate
Lau thinks the Senate ruling won’t have a major impact on Brazil’s long-term economic prospects because of a presidential election in 2018. “We’re still confident holding on to Brazilian equities despite whatever happens on May 12,” he says.
Regardless of the outcome, Tan notes that it will take time for the government to revive the economy.
“If [Rousseff] somehow manages to stay in, the markets and currency might pull back and it’ll take longer to get changes done,” says Tan. “But, the fact that she went through this process has weakened her power and therefore she has to broaden her base of supporters and be more orthodox in policy.”