Brazil and Latin America: Beyond the Headlines

By Will Landers, head of Equities at BTG Pactual Asset Management

Brazil, as well as much of Latin America, has not been a focus for the global media nor for most investors in the last decade – and when it was, the headlines have generally been negative. But, during this pandemic period caused by Covid-19, Brazil’s economy has surpassed pessimistic expectations, and the region is fully participating in the V-shaped economic recovery experienced in many parts of the world.

The new coronavirus pandemic brought to Brazil, as well as to the world, significant challenges not seen in generations. Controlling the virus’ spread, developing effective vaccines in record time, and dealing with millions of untimely deaths around the globe caused havoc to most economies. Global leaders have had to make tough decisions at many points during the pandemic, most of them without unanimity even within scientific and health circles, much less around political leaders.

Taking a step back, Brazil had been dealing with its own challenges well before the pandemic hit – the ramifications from the impeachment of President Dilma Rousseff in 2016 and the associated “car-wash” investigation (which included high ranking officials, including those inside Petrobrás, one the country’s largest listed companies), brought a lot of question marks about governability and the impacts that this would have on economic activity.

The transition government of President Michel Temer shifted the focus from the political to the economic arena. Starting in 2017, the administration adopted market friendly economic policies that were much needed in order to restore confidence and return the country to growth. At the forefront of these discussions was the much-needed pension reform, which was discussed and digested by all sides during this period and was passed early on during the next administration. This reform improved fiscal accounts and was a major political victory for the country, solidifying fiscal discipline.

The election of Jair Bolsonaro in 2018 with a liberal economic platform was a first for Brazil’s young republic, a major step for the Brazil that we find today. The administration continued to move forward with an aggressive reform agenda, despite lots of political opposition, looking to reduce Brazil’s bureaucratic ways. Savings from such reforms were critical for the country to be able to spend what was needed during the toughest days of the pandemic without putting the country’s solvency at risk. In this regard, the government’s ability to provide support at the fiscal, monetary and social levels was a positive surprise, reducing where possible the pains of the pandemic.

In 2021, Brazil is expected to post GDP growth in excess of 5%, a much higher number than what was forecasted at the beginning of the year, even by the more positive economists. After seeing its economy decline 4.1% in 2020 (a much more benign number than experienced by most peers), many doubted the country’s ability with its continental dimensions to restart its industry and service sectors.

The challenge going forward is for the administration to stay true to its liberal policies, move forward with the much-needed fiscal reform, continue to reduce the size of government via an administrative reform, and give continuity to the privatization program. These are all necessary steps in order to reduce the cost and bureaucracy of doing business in Brazil and make the country more efficient for investors as well as for its population alike.

During their first two and a half years, the Bolsonaro administration signed 74 concession agreements (across airports, ports, railways and highways), with investment commitments of approximately US$15 billion. Those commitments get multiplied by five when including privatizations and concessions in the sanitation, electricity and oil & gas sectors. A recent presentation by Brazil’s Infrastructure Ministry points to a pipeline that can double those amounts in the next two years.

At the corporate level, Brazil continues to show the depth of its corporate sector and the high quality of entrepreneurs and executives alike. Foreign direct investment has been strong, with direct investments in Brazil’s stock exchange accounting for close to US$24 billion year-to-date. Capital markets have also been quite active, with 44 IPO’s and 64 follow-on offerings being priced in the first three quarters of the year. IPOs added over R$300 billion to Brazil’s market cap, increasing the exchanges liquidity and depth.

We spent a lot of time speaking about Brazil because when looking at Latin America’s potential for returns, Brazil is key. Accounting for close to 65% of the region’s liquidity, one needs Brazil to be working for a Latin American portfolio to perform.

The rest of the region was not spared suffering from the Covid-19 crisis, and for the most part, is on the way to recovery. Chile performed well in term of providing a financial safety net to its population through various different programs; its economy ranks among the best performers in 2021, with GDP expected to grow close to 9%, fueled by strong performance in the copper sector as well a recovery of the domestic economy. At the macro level, the presidential election taking place in November and the new constitution being drafted are keeping investors on the sidelines despite the positive economic news.

Peru is a question mark with the new administration that took office during the second quarter pointing to populist and interventionist policies.

On the other hand, Colombia is poised to deliver a high single digit GDP figure this year, with President Duque finishing his mandate delivering on needed fiscal reform and improving the ease of doing business in Colombia. After this strong economic recovery in 2021, focus will shift to the electorate’s direction during the May presidential elections.

Finally, Mexico continues to benefit from some key drivers for growth – the free trade agreement with the US and Canada; the continued trade tension between the US and China, leading to more industrial investment in Mexico; and billions of dollars in remittances from Mexican Americans to their families in Mexico.

In summary, when looking at Latin America, it is worthwhile going beyond the headlines that tend to focus on politics and election cycles and focus on the strengths and resilience of the economies in the region.

Different countries provide different opportunities from natural resources, to agricultural lands and growing middle classes. Young populations with expanding income along with ample natural resources – isn’t that the reason why investors started to look at Emerging Markets? Add improving ESG trends and high quality and tested management teams, and this is the Latin America we prefer to read about.