The 30% rally in the MSCI Brazil index from the lows of September 2018, shortly before far-right retired military officer Jair Bolsonaro beat PT Party rival Fernando Haddad to become president, shows how his win has lifted sentiment towards Latin America's largest economy.
Market optimism comes despite Bolsonaro’s well-publicised admiration for the country’s military dictatorship and defence of torture and the death penalty, which might hamper the country’s efforts to improve its image following the corruption scandal which engulfed the previous government.
Investors have rushed to up their exposure to the country's stocks, with data from Morningstar showing inflows into Brazilian domiciled funds every month since Bolsonaro was elected.
Richard Adams, client portfolio manager at American Century Investments (ACI), said: ‘The Brazilian equity market has performed well since the recent lows seen in the summer of 2018, albeit with some tempering of optimism in the last couple of months.
‘The initial rally was based on anticipation of market-friendly policies, including pension reform.’
A pro-market platform
Peter Taylor, head of Brazilian equities at Aberdeen Standard Investments, said the rally had been driven in part by the man chosen by Bolsonaro to manage the country’s purse strings, Paulo Guedes.
Taylor added that Bolsonaro offered a clean break with the 'Car Wash' corruption scandal involving state-owned oil company Petrobras (PETR4.SA) that led to the jailing of former president Luiz Inacio Lula da Silva, unlike his former rival for the presidency, the PT Party’s presidential candidate Fernando Haddad.
‘Although Haddad himself is seen as a relatively moderate figure, his political party was at the centre of the "Car Wash" corruption scandals, while his election campaign rhetoric proposed a return to the discredited economic framework of the last decade,’ he said.
‘Having appointed Chicago-trained economist Paulo Guedes as his economy minister, Bolsonaro had adopted a strongly pro-market platform, that would preserve and even extend the essential economic reforms of the previous government under Michel Temer.’
As the stock market surged, the team took profits, Taylor said, as a number of stocks were becoming richly valued.
The index has stuttered more recently, however, falling by 6% over the last month.
‘Following the election, markets moved ahead strongly, and we took the opportunity to selectively trim positions, where we believed valuations were stretched,’ he said.
‘We recently added Brazilian state-owned oil firm Petrobras to our portfolios, but have reduced exposure to petrochemical and gas distribution company Ultrapar (UGPA3.SA).
‘Petrobras has restored its focus on profitability with a clearer strategy, a cleaner balance sheet, better governance and a better overall commitment to value creation, with clear targets for management.’
Adams also began the year with an overweight position to Brazil equity, later shifting to an underweight position after locking in profits.
Adams is still finding growing opportunities within the digital sector, however, pointing to Lojas Renner (LREN3.SA) and Magazine Luiza (MGLU3.SA) as two leading retailers benefiting from consumers’ move to digital transactions, he added.
He is also backing B3 (B3SA3.SA), which operates the Brazilian stock exchange, as well as clearing, settlement and trading in commodities and derivatives.
Taylor is meanwhile not short of Brazilian opportunities passing his environmental, social and governance (ESG) screens.
ESG is ‘deeply embedded’ in the Aberdeen Standard's investment process, Taylor said, with the group ready to vote against proposals that clashed with it.
‘We are very close to our companies in Brazil, with a team of five investors on the ground. Our team are able to conduct frequent engagements with company boards and management, with ESG and stewardship both integral to our investment process,’ he said.
‘We take our proxy voting responsibilities very seriously, as a way we can influence positive change in our companies.
‘Fund managers are actively involved in the final voting decisions for the companies under their coverage.’