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Fund Manager Diaries: Brazil update

Brazil suffered a severe recession in 2016, experienced anaemic growth in 2017 and will likely continue this trend through 2018. Therefore the fledgling recovery is yet to visibly reduce unemployment and kick-start cyclical growth. Indeed, the market is pricing in a continuation, and even deterioration, of this difficult environment.

We are, however, constructive on the country, currently 58% of our Latin America portfolio, as we find it extremely attractive from a technical, business cycle and valuation perspective.

Concluding thoughts

The market is deeply sceptical and has heavily discounted asset prices on the basis of dysfunctional politics. We believe this view ignores the realities; the political class are under no illusions that fiscal reform is required, despite the roadblocks Brazil’s recovery has been delayed rather than reversed and valuations already discount a significant deterioration. In short, we see similarities to 2002, 2009 and 2016, years in which a massive change in Brazilian politics coincided with a violent drop in risk premia and sharp equity market rallies. Our positioning reflects our optimism and is biased towards out of favour, high quality companies that in some cases offer over 100% potential returns.