Brazil has seen many negative headlines in the last few months. The country is among the hardest hit by the coronavirus pandemic, just behind the United States in the number of reported cases.
But there is some positive news from an investment standpoint. From its lows in late March, the Brazilian stock market has recovered more than 55% in local currency terms and more than 45% in US dollar terms.1
What Explains the Current Interest in Equities?
In the past, Brazil offered high interest rates to local savers. Most of them just bought government bonds to receive solid returns. Many investors felt there was no need to bother with what they perceived to be more risky investments, such as equities.
However, over the past decade, interest rates have dropped quite dramatically. Interest rates are now at historically low levels, with the central bank’s benchmark short-term rate, the selic, currently around 2%, compared with more than 14% only four years ago. Brazilian investors used to healthy fixed income yields thus needed to look for alternative ways of generating returns.
In this low-yield environment, many of them have started turning to the equity market. The number of trading accounts has been increasing exponentially. Brazil’s stock exchange has seen a surge from around 600,000 accounts in 2008-2017 to nearly three million accounts today.2 (See chart below)
Is this the peak of the trend? In our view, probably not. With a population of more than 210 million inhabitants, still less than 1.5% of Brazilians are currently engaged in the stock market. However, new investors are discovering the potential opportunities. Not only are more women investing in Brazil’s market, up from 22% in 2018 to 25% today, but it is attracting growing interest among the younger generations of both genders.3 More than 70% of investors are aged 46 and under, representing more than 25% of value invested in the stock market.4
Investment Themes in Brazil
As investors ourselves, we like the financials sector in Brazil, especially companies with strong capital market exposure. Interestingly, Brazil’s stock exchange itself (Brasil, Bolsa, Balcão or “B3”) has a strong sustainability agenda—in 2004, it was the first exchange in the world to adhere to the UN Global Compact. Environmental, social and governance principles are not only implemented within the exchange itself, but also promoted in the Brazilian stock market broadly. An example is the Corporate Sustainability Index (ISE), launched in 2005.
E-commerce is another exciting investment theme, with several large players competing in the online space. As in other countries, the COVID-19 crisis has accelerated the adoption of internet-based retailing in Brazil. The largest economy in Latin America, household consumption in Brazil is about 64.3% of gross domestic product,5 so the consumer sector in general is strong, vital and offers a variety of interesting investment opportunities.
Despite continued uncertainties, our view on Brazilian equities is generally positive. Despite the recent rally, the market is still down more than 35% in US dollar terms since the start of the year, so we think there is high recovery potential.
What Are the Risks?
All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.
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1. Sources: Bloomberg, Ibovespa Index, March 23, 2020–August 31, 2020. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.
2. Source: Brasil, Bolsa, Balcão (B3). Number of individual trading accounts in Brazil, as of July 30, 2020.
3. Source: B3, as of August 2020.
5. Source: “Investment Guide to Brasil 2019,” data as of 2018.