I spent 10 days in Brazil in August 2021, visiting technology, retail, real estate, and health care companies in search of stocks to add to my potential “buy” list. I met with 22 corporate CEOs, 21 of whom told me I was the first foreign investor they’d seen in person since pre-COVID. Many of them chatted with me for over an hour — a vivid illustration of how there is just no substitute for being on the ground in emerging markets (EMs), especially at a time like this.
I departed with some valuable insights into a number of companies that led me to better appreciate the robustness of their business models. Indeed, there are plenty of stock- and industry-specific investment opportunities in Brazil, which I’ll explore in a future blog post. But at the broad country level, I left with a decidedly more negative take. The analogy that came to mind was that of Brazil being in a “straitjacket,” with all the unpleasant connotations that evokes (confinement, discomfort, distress, and so on).
As recently as a few months ago, I thought Brazil’s macroeconomic picture could surprise to the upside heading into 2022. I no longer think that. In fact, my view has grown even more negative (albeit marginally) in the weeks since my return to the US. To extend the metaphor, I’d say the straitjacket has been yanked a bit tighter. Let’s take a closer look.
Stiff macro headwinds for Brazil investments
I now believe Brazil’s troubled macro backdrop can persist and perhaps even take a turn for the worse. It’s ironic because Brazil has brought its COVID numbers — case counts, hospitalizations, and deaths — down sharply over the past few months. And authorities there expect an 85% – 90% vaccination rate by the end of this year. Meanwhile, Brazil’s economy is tracking at about 6% growth, the unemployment rate is falling (but still high at 14%), many consumers are spending again, and the global environment of healthy growth, ample liquidity, and elevated commodity prices is largely supportive.
At the moment, however, and looking ahead to the October 2022 presidential election, I think inflation, politics, and other headwinds will make Brazil a challenging market for investors to navigate in the coming months:
- Inflation is the heaviest tax on the poor. Brazil’s headline inflation has “only” been running at around 8%, but gasoline, electricity, medical, and food prices have been rising at closer to a 15% clip (Figure 1). Not surprisingly, many average Brazilians are feeling the pinch of these price increases. With such high rates of inflation, it will be very difficult for the country to generate sustained economic growth, in my view. GDP growth estimates for 2022 have already drifted down to about 2%. And based on my latest trip, I find the “inflation is likely to be transitory” argument to be suspect at best.
- Choppy politics may drive country risk higher. I think the 12 months between now and the 2022 Brazilian election will be marked by an overhang of uncertainty on a market that has experienced political breaks in the not-so-distant past. It’s still far too early to hazard a reasonable guess as to the likely election result, as evidenced by the lack of any consensus among even the “experts” at this point: I recently spoke with two political consultants, each of whom had a very different prediction for the election outcome.
- Brazil remains saddled with the same problems it’s had for decades. These include low saving rates, sluggish investment, and poor infrastructure, along with inadequate health care and education.
Opportunities amid challenges
In my next blog post, I’ll look at some thematic opportunities in Brazilian equities.