Brazil Update

Brazil Update

The Brazilian stockmarket has been one of my highest conviction ideas. I am not just talking about today, but back in 2003. Back then Brazilian equities were dirt cheap, and under-owned. The Asian crisis of 1998, which morphed into an emerging markets crisis, kept investors away. I can even recall our recommended exposure at the firm where I world, being zero. That wasn’t before the fall, but afterwards.

Emerging markets comprise 80% of the world’s people, land mass, and natural resources, yet don’t bother, said the strategist. Not only that, but they were also dirt cheap, and a commodity bull market was forthcoming. He couldn’t have been more wrong. Emerging markets beat the world until 2011, and Brazil was out in front. In simple terms, the Bovespa beat the world eight-fold.

Brazil in the Lead

Source: Bloomberg

The Bovespa Index data goes back to the early 1990s, but it doesn’t tell the whole story. There were also dividends, and lots of them. Using total return data and comparing it to the world, we get a more precise picture of the fate of Brazilian equities. When you add those dividends back in, you realise it was more of a matter of the rest of the world catching back up than Brazil going backwards. Such was the outperformance in an era of heightened commodity demand.

Brazil vs the World Total Return

Source: Bloomberg

That is encouraging because a broken economy doesn’t look like this. Despite all the success of technology dominating the world index these days, Brazil is still 23% ahead since 2001. Bringing in more countries and regions, it’s quite the picture. The USA is in second place, just behind Latin America. You can see why I like it. /

Global Equity Returns

Source: Bloomberg

In case you are wondering, the UK and Europe are twins, so there is no need to show both. They are ahead of Asia and Japan, but only slightly. It is also interesting to see how China surged and collapsed. You have probably seen different indices showing much worse performance from China. The MSCI China Index includes the China-US listed technology stocks such as Tencent (700 HK), Alibaba (BABA US) and PDD (PDD US).

The bottom line is that Latin America is an underappreciated star, and when I sensed it had turned the corner in 2022, I felt the portfolios should be exposed. The local market is impressive, and companies like Embraer are world leaders in the aircraft industry. But when it comes down to it, Brazil is a commodity producer, and the financial markets respond to commodity prices. I show the relative performance of the Bovespa, along with the oil price.

Brazil and Oil

Source: Bloomberg

The state oil company, Petrobras, makes up around 16% of the index and reported last week. There was a lower-than-expected dividend payment as the company embraced the green transition by presidential order. The market knocked the shares down by 17%, which explains the downward move in the index and the currency.

I would say that most governments are embracing the green transition, and what President Lula has just done, is nothing compared to what the UK prime minister did to the oil and gas companies operating in the North Sea, where profits were super taxed. Moreover, Petrobras claim they will not “do a crazy energy transition” and will be one of the last oil companies standing.

Lula presided over the bull market between 2003 and 2008, and I don’t think we should be too worried at this point. But my confidence on this relatively high conviction trade, represented in both portfolios, might be tempered if the situation gets any worse, or a better opportunity arises.

I had expected Brazil, and the region, to deliver superior results. I am hoping the market reaction is overdone, and for the time being, no action. I shall be following events closely.


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