Fortuna AM: Brazil - Order and Progress

November 2, 2022

This article was originally distributed on the 28th of October 2022, before the conclusion of the 2022 Brazilian election on the 30^th of October.

Ordem e progresso is the motto that centres the Brazilian flag and a return to order and progress in Brazilian markets is something we anticipate. The final round of the Brazilian election will conclude on October 30^th.  Despite the uncertainty, the consumer carries on with their daily needs and expenditure, and the country has proved to be an attractive source of selective investment opportunity for the Aubrey Global Emerging Market portfolio.

Lojas Renner, the clothing retailer, has successfully developed their online offering and now expanded the brand equity into home furnishings, similar to several European companies.  Raia Drogasil has built on their market leading position from the merger of the two groups over 10 years ago and expanded throughout the country to cater for the different income groups outwith their Sao Paolo home region.

The operating outlook has been difficult of late as the country faced the challenge of rising inflation through 2021 and the tough medicine of increased interest rates.  With hindsight, Brazil was ahead of that particular curve as the rest of the world has suffered through 2022.  Brazil may now be in a position to cut rates and with a favourable election income, provide a catalyst for renewed consumer enthusiasm.

Former president, Luiz Inácio Lula da Silva (known as Lula) is running on the promise of increased public spending to fund social justice reforms. His ambitious plans become rather woolly when it comes to how he intends to fund them and his critics point across the border to Venezuela as an example of where socialist policies can lead.

However, these accusations gust of sensationalism as during his early tenure as Brazil’s president (2003-2010) Brazil’s govt bonds were upgraded from speculative to investment grade. The poor benefitted from social measures such as cash grant programmes, aid to small farmers and labour/pension reform which are credited with lifting 20m Brazilians out of poverty.

Notwithstanding the fact that Brazil’s economy was being helped by a significant tailwind in commodity prices, the claims that Lula’s fiscal policy will lead to economic instability are harsh based on the first period of his administration.

Against him the incumbent, Jair Bolsonaro, spent his first term in power dismissing COVID as insignificant while currying favour with his conservative supporters amongst businessmen and landowners.  Many Brazilians have become disaffected with Bolsonaro’s Trump-like antics which include disregard for the environment (allowing the Amazon to be plundered by logging companies and agribusinesses), misogyny and mishandling of the COVID crisis.

As a result of this discontent Lula entered the campaign as the favourite according to pollsters. However, Bolsonaro won more votes than forecast, gaining 44% against Lula’s 48% (the remaining 8% shared between the other candidates). Lula remains the favourite, however, given the inaccuracy of the polls so far, the result is too close to call as the country heads into the deciding round of votes.

Furthermore, despite Lula’s plans to crack down on big business and expand the constitutional limits of public spending, it appears unlikely that he will be able to follow through with them in the event of becoming president: the Brazilian congress is dominated by the right and large blocks that represent business interests which make unlikely that Lula will be able to implement radical policies.

This has given investor sentiment a boost and, while many LATAM fund managers are holding above average levels of cash, it is likely that in the aftermath of an orderly election (by no means guaranteed) there will be a collective sigh of relief and upside to be seen in Brazil.

Recent polls suggest a narrowing of the lead for Lula, hence this will be a close outcome.  However, once the dust has settled some of the best quality names on our watchlist could well make a reappearance in the portfolio.

Camellia Huang | Investment Analyst

Camellia joined Aubrey in 2020 as an Investment Analyst after gaining a range of experience in previous roles.

Camellia started her career in investment management at Seven Investment Management in London and Qianhai Equity Exchange in Shenzhen. She then worked at Aberdeen Standard Investments where she was an Investment Analyst in Private Markets across their Corporate Finance, Diversified Assets, Infrastructure Equity and Private Equity teams.

Camellia has gained a Master’s degree in Accounting and Finance from the University of Edinburgh. She has lived and studied in both China and Australia and is fluent in Cantonese, Mandarin and Hakka. She has also completed Level 1 of the CFA course.

Ralf Martyrossian | Sales Associate 

Ralf joined the Aubrey sales team in 2022. Before joining Aubrey, he studied English Literature at Bristol University and worked as a Partnership Manager at a London based FX specialist. He is responsible for marketing Aubrey’s strategies to institutional investors and contributes to Aubrey’s sales efforts.