In my October blog post, A firsthand look at Brazil’s straitjacket, I painted a rather grim portrait of Brazil’s macroeconomic landscape following my latest visit to South America’s most populous nation. The “straitjacket” metaphor arose from my sense that Brazil may be increasingly hemmed in by its elevated rates of inflation — the heaviest “tax” on the poor — along with political uncertainty leading up to its October 2022 presidential election and a host of other country-level challenges.
I still believe that. But despite my downbeat macro outlook, as an emerging markets equity investor, I think there is a decidedly more positive side to Brazil’s story. After meeting with 22 of the country’s corporate CEOs, some of whom chatted with me for more than an hour, I came away more convinced than ever that Brazil offers plenty of stock- and industry-specific investment opportunities. You just have to know where to look.
Four investable themes in Brazil
So how can you seek to make money in Brazilian equities, knowing that high inflation, choppy politics, and other macro headwinds are likely to work against you in the months ahead? Focusing on investable themes is, in my view, often a good place to start. Here are some to consider:
- Inflation-protected industries: One strategy that seems to make sense to me is to invest in fragmented, inflation-resistant industries whose growth and performance prospects are not necessarily dependent on the path of Brazil’s broader economy. For example, I believe less inflation-sensitive sectors like hospitals, software, food retail, truck rentals, and certain industries with supply shortages from COVID disruptions can prove resilient, even against a backdrop of rising prices and lackluster GDP growth in Brazil.
- Shifting asset flows: Another strategy worth pursuing may be to position investment portfolios in anticipation of a potential unwinding (or at least slowing) of the so-called “equitization” of Brazil that has been ongoing for a few years now. The large-scale rotation from fixed income to equities that occurred from 2019 – 2021 may be poised to reverse as Brazilian interest rates rise amid persistently high inflation. If I’m right, we will likely see more investor flows into fixed income assets in the coming months. Banks and insurance companies in particular can benefit from this shift.
- A digitalized economy: The inexorable trend toward deeper internet penetration and a more digitalized Brazilian economy is an exciting, popular, and potentially lucrative investment theme for a number of reasons. However, I believe rigorous research and careful stock selection are critical here because value propositions can differ so widely among individual companies. While in Brazil, I visited digital banks, merchant acquirers, e-commerce platform providers, and software companies. They all see massive addressable markets for their products, some of which haven’t even launched yet. I am skeptical of some of their claims and suggest sticking with today’s e-commerce leaders for their better growth prospects, greater scale, and more favorable unit economics.
- The IPO boom: The recent initial public offering (IPO) boom in Brazil, aided by relatively low interest rates, has brought to the market many outstanding companies, more than any previous IPO wave I have witnessed. At this juncture, I have little doubt that the best ones of the bunch will be able to perform well going forward, the economic and political risks hanging over Brazil notwithstanding.
In my judgment, discerning equity investors should not let Brazil’s troubled macro environment dissuade them from exploring the country’s wide range of attractive stock opportunities.