Oxstones Investment Club™By Agustino Fontevecchia,, Forbes Blog,
Money managers, bankers, traders, and analysts agree that the Brazilian economy is headed for a soft landing. As the Dilma Rousseff administration tackles inflation and currency appreciation, despite some disagreements with Finance Minister Guido Mantega, Brazil will see output slow to more sustainable rates, giving investors the opportunity to capitalize on secular trends like a rising middle class and bet on long-term fixed income, according to Oppenheimer’s chief investment officer, Art Steinmetz.
The rise of the BRICs in the last decade catapulted Brazil into the world’s center stage, as investors flooded the country with capital and sought to capitalize on a massive economy with a huge population escalating the socio-economic ladder. But the cycle has changed, according to many experts that came together Thursday in New York for the Bloomberg Brazil conference.
“There is no bubble in Brazil,” explained Steinmetz, Oppenheimer CIO, “but there is wage-push inflation, and it will be moderated by tightening, as the Brazilian authorities have the tools, the support, and the government mandate,” explained Steinmetz.
Controlling inflation is what will send Brazil into the next stage in its business cycle. After a decade of turbo-charged growth, output will necessarily decelerate, as the labor force approaches full employment and inflation forces the hand of President Dilma Rousseff. (Read Brazil: A Bubble In Labor Markets?).
How can investors capitalize on Brazil’s next stage?
Steinmetz outlines the prospects for a variety of asset classes, but its secular trends that one must look into, he says. “You have to get deeper than the [Bovespa, the benchmark equity index] and look at individual companies that are capturing the themes that are durable, such as the rising incomes of the middle class.”
Equities in Brazil are a difficult creature to understand, with approximately 50% of the Bovespa market cap concentrated in eight “national champions” that mainly include commodity giants like Petrobras and Vale. “Retail is an important sector, but we like luxury brands, given the aspirational component of rising to the middle class,” said Steinmetz.
Brands like Hermes and Louis Vuitton (owned by billionaire Bernard Arnault’s LVMH) captivate the attention of the Brazilian consumer, with reais in his pocket given rising wages and the social want for distinction.
Steinmetz warns of not overpaying for Brazilian equities, and tells foreign investors to look at fixed income as well. While he doesn’t liked inflation linked bonds (“they only make sense if you believe that markets aren’t appropriately discounting inflation going forward; I don’t have a strong conviction that that’s the case”), Oppenheimer’s CIO believes long-term real interest rates will have to fall, giving investors the opportunity to capitalize, ahead of time, on a trend he believes to be obvious. (Read No Credit Bubble In Brazil, Just Dangerous Consumer Debt Burden).
Long duration fixed income, such as 10-year sovereigns. Brazil’s record high rates are a consequence of “backward looking fears of policy slippage or weakness, undisciplined fiscal policy, frankly inflationary monetary policy,” according to Steinmetz. But as the economy goes forward, these issues will subside and rates will come down. Steinmetz suggests buying and holding long-duration fixed income, such as 10-year sovereigns, and rolling them out, staying out in the same part of the yield curve.
In relation to the coming Olympics and World Cup, the CIO warned investors not to jump in to any project. With the Brazilian Development Bank (BNDS) providing cheap financing, opportunities are limited and due diligence probably won’t be thorough. Instead, look into private-public partnerships, but be careful with the legal and regulatory framework. “If you get involved and things go bad, the environment is not too friendly for foreign investors and there’s lots of corruption sometimes,” he said.
Brazil, along with many of its peers in the so-called emerging market camp, are leading the world into a new stage, where the relative importance of the historically weaker, “Southern” nations exceeds that of the developed or advanced nations. Investors have been aware for a while that the booming economies of these super-giants provide ample opportunity, but, as Steinmetz puts it, the cycle is changing. Investors will be forced to move with it or they, too, may suffer from chasing the curve.
Tags: brazi stocks, BRAZIL, consumer spending, emerging middle class, luxury brands, middle class, Olympics, petrobras, socioeconomic, vale, World Cup