Things are looking very bad for Brazil. The Manaus variant has brought the coronavirus back very quickly. And Lula got off. Former leftist president Luiz Inacio Lula da Silva was released from prison last month after a court basically overturned his corruption conviction and looks set to challenge incumbent Jair Bolsonaro in October 2022.
All that means it might be time to buy. “I would be surprised if things didn’t get better a month from now,” said Verena Wachnitz, portfolio manager for Latin American equities at T. Rowe Price.
iShares MSCI Brazil
Exchange-traded funds (ticker: EWZ) have fallen 7% this year, while global emerging markets are up 5%. That makes Brazil the third cheapest emerging market after Russia and Turkey with an average price / income ratio of 9.2, calculates Alex Altmann, head of equity trading strategy at Citi. “Assuming that virus cases once again appear to be peaking, Brazil is starting to look quite attractive,” he said.
That assumption is reasonable, added Malcolm Dorson, Latin American portfolio manager at Mirae Global Asset Investments. The rowdy Bolsonaro virus skepticism delayed the launch of Brazil’s vaccination. But underrated national health services can be swiftly accelerated. “This system can handle 2 million shots a day,” he said. (Now that number is around 600,000.) “That’s the best in all emerging markets.”
The Bolsonaro-Lula fireworks have distracted attention from calmer political advances. Congress has somewhat deftly compromised pandemic stimulus and long-term debt concerns, said Wachnitz. It extended the so-called cash transfer voucher program by four months in exchange for tighter fiscal controls in the future.
The central bank raised interest rates by 0.75 percentage points on March 1, after flirting with negative real rates. That should support a currency that has fallen by 5% this year even as prices for Brazilian commodity exports strengthened, said Tony Wolpon, a former central bank governor and now head of strategy for the WHG in Brasilia. “The real effective exchange rate is the cheapest since 2002, when we had a political crisis and there were no reserves,” he said. “Now we have $ 300 billion.”
Wolpon is also relaxed about Lula, who held power from 2003-2011, getting another shot at age 76. “Lula is totally center-left. [Bill] Clinton-[Tony] “Good man, Blair,” she said. “Brazil achieves an investment level rating below Lula.”
The Brazilian market offers a variety of strategies for betting on recovery. Dorson likes well-established, well-established consumer names like drugstore chains
(RADL3. Brazil) and department store operators
(LREN3. Brazil). Both stocks have survived even into the first quarter selloff.
The country is rich in fallen tech angels who can rise up due to rising global or local sentiment. Payment provider
(PAGS) have both lost a quarter of their value since mid-February. Electronics seller
(LWSA.Brazil), the Go Daddy of Latin America, experienced an almost as strong decline.
Champion of state owned oil
(PBR) is a special recovery bet. The company’s shares have plunged 23% since February 22, when Bolsonaro fired his CEO for daring to raise fuel prices in line with crude oil. Crude oil has held steady near its three-year high since then.
Brazil is a turbulent place where the good news may not last. Bolsonaro could respond to Lula’s challenge by “being populist” and spending the budget, Dorson said. Election fever, and spending, is likely to grip the nation at this time next year. But a lot of bad news was to be expected.