Brazil’s Stocks Are Up 30% This Year, But Bargains Can Be Had

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Brazilian stocks have been surprise stars this year, as prices soared for the country’s commodity exports—oil, iron ore, foodstuffs—and beaten-down valuations proved irresistible.

the

iShares MSCI Brazil
exchange-traded fund (ticker: EWZ) has jumped 30% since Jan. 1, while global emerging markets have lost 12%. The real, buoyed by terms of trade and a super-hawkish central bank, has gained 24% against the dollar.

The next leg up looks more challenging. Tough monetary policy—interest rates have ballooned to 11.75% from 2.5% over the past year—halted a postpandemic growth spurt. The central bank won’t ease until double-digit inflation cools, which may not be until next year. A presidential election in October pits erratic incumbent Jair Bolsonaro against leftist challenger Luiz Inácio Lula da Silva—and investors aren’t thrilled about either.

Brazil optimists are shifting to a longer-term view. “My job is to look for companies that will take off when rates are cut in early 2023,” says Malcolm Dorson, Latin American portfolio manager at Mirae Asset Global Investments. Short-list names include investment bank Banco BTG Pactual (BPAC11.Brazil), department-store chain

Lojas Renner

(LREN3.Brazil), and design house Arezzo Industria e Comercio (ARZZ3.Brazil).

The market’s rally this year has been sharp but narrow, driven by oil giant

Petroleo Brasileiro

(PBR) and iron-ore colossus

vale

(VALE), plus big banks led by

Itau Unibanco Holding

(ITUB). Bargains remain elsewhere, says Tiago Rodrigues, a São Paulo–based investment manager at asset manager abrdn. “The market has moved from very discounted to just discounted,” he says. His picks include Arezzo, software provider

totvs

(TOTS3.Brazil), and pharmacy chain

Raia Drogasil

(RADL3.Brazil).

Bolsonaro, while prone to outrageous rhetoric on the pandemic and environment, has let economy minister Paulo Guedes steer a deft course through challenging times. Debt to gross national product was kept well below the 100% landmark that markets fretted about. The central bank wins kudos for battling inflation proactively. “Brazilian policy makers can give themselves a pat on the back,” says Jared Lou, an emerging markets debt portfolio manager at William Blair. “They’ve gained a lot of credibility.”

Lula, who was president from 2003 to 2011, assuaged some anxiety by naming a centrist former São Paulo governor as his vice-presidential running mate. “Fears of Lula coming to power are easing as he sounds a bit more pragmatic,” says Allison Fisch, emerging markets portfolio manager at

Pzena Investment Management
†

All the same, she’s limiting her Brazil appetite to a “few idiosyncratic cheap opportunities.”

Brazil, which has barely grown since 2014, isn’t even talking about systemic reforms to taxes and public administration that could uncork its widespread bottlenecks, says Arthur Budaghyan, chief emerging markets strategist at BCA Research. Debt to GDP has doubled in eight years, leaving Lula, should he regain power, much less leeway to please his lower-income supporters.

Demand for such support could be dramatic, as the pandemic widened Brazil’s already gaping wealth gaps. “NGOs in the favelas [urban slums] say homelessness has increased three times,” says Mirae’s Dorson. Brazilian presidential contests rarely pass quietly under the best of circumstances. “You usually get a bombshell two to three months before any election,” says William Blair’s Lou.

Budaghyan is long-term bullish on Brazil and short-term cautious. “A centrist Lula will be good for Brazil,” he predicts. “But for now, the market has come too far, too fast.”