Christoph Brinkmann, portfolio manager of the BlackRock Latin American Investment Trust plc tells us why he believes that Brazil is becoming an increasingly interesting market and why it merits a closer look from investors despite having been overlooked in recent years.
Brazil is the largest economy in Latin America. It comprises 60% of the MSCI Latin America Index, and has four of the region’s five largest companies. It is where we concentrate a significant share of our analytical resources and time and is a source of many of the region’s richest opportunities.
However, in recent years, the Brazilian market has been overlooked and underappreciated by global investors. It has lost out to higher profile markets such as China, and more recently, India and is now a relatively small part of most emerging market benchmarks. It makes up just 5% of the MSCI Emerging Markets index, for example, which is dominated by global technology and communications companies such as TSMC, Samsung and Alibaba.
However, this also brings opportunity. Where a stock market is overlooked, it often creates mispricing which skilled active managers can capitalize on. The MSCI Brazil Index trades at just over half the valuation of the wider MSCI Emerging Markets index. To take advantage of this our analysts frequently travel to Brazil. Having boots on the ground, allows us to evaluate a range of opportunities, finding companies where the prospects for growth may have been underappreciated by the market.
There are several reasons why Brazil deserves more attention from global investors. One of them being the advantageous geopolitical position of Brazil. With well-established diplomatic ties to both Eastern and Western nations, where the US and China is now Brazil’s two largest trading partners, the country stands out as a reliable trade ally. Particularly important is the trade of its critical commodities. Its ability to trade freely with each side is likely to improve its economic position in the next few years, we believe.
Interest rates in Brazil are heading in the right direction
Brazil is also in a sweet spot when it comes to interest rates, as a result of the Central Bank’s swift reaction to the increase in inflation we were seeing in the aftermath of the Covid-19 pandemic. Brazil has operated with one of the highest real interest rates in the world for a period of time, resulting in inflationary pressures already subsiding, and leaving the Central Bank in a position to cut rates. We anticipate further reductions, particularly if the US Federal Reserve ceases its own rate hikes.
Lower rates would be good for the economy – it would allow for consumption demand to pick up and economic activity to get stronger. The OECD has already upgraded its economic growth forecasts from 1.2% to 1.9% in 2024 and there could be scope for further improvement. Cuts would also help flows into the stock market. With rates so high, international and domestic investors have tended to prefer the bond market, but this may reverse if interest rates fall and bond yields drop.
Why investing in Brazil presents opportunity
There are diverse opportunities in the Brazilian market. While the country might be best known for resources and energy companies such as Vale and Petrobras, it also has retail and healthcare companies with a strong pathway of growth. The opportunity set in Brazil is likely to diversify further in 2024, with more than 100 companies waiting to come to market. These companies are coming from a range of different sectors, including infrastructure and technology. It is an exciting time to be looking at the Brazilian market.
Brazil is becoming an increasingly interesting market and merits a closer look from investors. We believe Brazil is in a sweet spot for growth over the next few years, which provides a compelling backdrop for its companies and stock markets to thrive.
For more information on how to access the opportunities presented in Latin America, please visit www.blackrock.com/uk/brla
