The 30% rally in the MSCI Brazil index from the lows of September 2018, shortly before far-right retired military officer Jair Bolsonaro (pictured) beat PT Party rival Fernando Haddad to become president, shows how his win has lifed sentiment.
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 after the previous regime ended mired in corruption.
Looking at how wealth managers have moved assets after Bolsonaro was sworn in on 1 January, it is hard not to conclude that the benefits of Bolsonaro’s economic policies have, to use his ally’s name, ‘Trumped’ the impact of his offensive comments about women, LGBTQ+ people and indigenous Brazilians.
Data from Morningstar shows there have been positive net flows 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 has been driven in part by the man chosen by Bolsonaro to manage the country’s purse strings, and that he offered a sharp break with the recent past compared to the PT Party’s presidential candidate Fernando Haddad, who was closely associated with the outgoing government.
‘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 6.49% over the last six months.
‘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.
‘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.’
Opportunies out there
Adams is still finding growing opportunities within the digital sector.
Lojas Renner and Magazine Luiza are two leading retailers benefiting from consumers’ move to digital transactions, he added.
He is also backing B3, which operates the Brazilian stock exchange, as well as clearing, settlement and trading in commodities and derivatives.
With a leader such as Bolsonaro, you might think it would be difficult for Brazil to pass environmental, social and governance (ESG) screens, but that is not proving the case.
ESG is ‘deeply embedded’ in the ASI investment process, Taylor said, and Bolsonaro’s rhetoric alone has not crossed the team’s ESG threshold.
He also stressed that ASI’s investors on the ground are ready to vote against proposals harmful to progressive values.
He said: ‘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.
‘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,’ he said.