Q&A on Brazil

I was recently asked a series of questions on Brazil. Here are the questions and my answers:

Q1. What's your current perspective on Brazil? 

A: My view on Brazil might best be described as “concerned”. This is because the current desire for complete reform of the government could slow as a result of the continued popularity of Lula and his supporters. This could lead to a slackening of the reform movement or even its complete demise. 

Q2. One year ago, you mentioned structural reforms were still expected to be implemented in Brazil. Recent public opinion polls show that most centrist, reformist candidates are having trouble gaining traction. How do you see the political risk in Brazil? Has the risk of turning away from the path of structural reforms increased? 

A: Yes this is a real problem and heightens the political risk. The “lavo jato” scandal was a watershed moment and ushered in a tremendous shift in public consciousness, with calls for a change in how the country is governed. However now a weakened reformist candidate points to problems going forward.

Q3. Regarding the stock market, do you think Brazilian shares are trading at attractive levels, compared to other emerging market peers? What are your favourite sectors/stocks at this moment? 

A: Brazilian shares generally are not trading at bargain levels but there are some well managed firms that look attractive. Our favourites are companies with good corporate governance who have resisted the temptation to engage in corrupt practices and respect shareholder rights. In regards to industry sectors, consumer products and distribution groups are the most attractive to us. However, there are also some manufacturing firms who have a strong international positions and are able to earn substantial foreign exchange, which also makes them of interest. 

Q4. The Brazilian Real recently weakened to close to 4.00 per dollar and economic activity data points to a weaker-than-expected recovery. Do you think these two factors may reinforce the downside risks to company earnings? 

A: Actually the weak Real could be a blessing in disguise since export oriented firms will do much better in overseas markets. Generally the weak currency, if combined with continued increases in productivity, could make the market more attractive.

Q5. What strategy should Brazil's central bank look to adopt in the current market conditions? 

A: The central bank in Brazil should focus on working towards a liquid foreign exchange market so that the currency can find its market level. It should not try to control the exchange rate since such expenditures are a waste of precious foreign exchange and stimulate further exits. The Brazilian central bank should do all it can to persuade the government to streamline investment procedures, which will encourage both domestic and foreign investment.