11th March 2015
Many investors in Brazil, including us, have been a little frustrated over the past couple of years with its lack of growth and progress. Gross domestic product (GDP) in Brazil grew a mere 0.2% in 2014 (estimated), a far cry from the 7.5% it saw in 2010.1 However, we believe Brazil has all the elements in place to achieve much higher rates of growth if the political will is there.
My team and I traveled to Brazil in February to take a pulse-check of the business and economic environment there. We also had a chance to enjoy some post-work festivities at Carnival, where we could see the mood of the people there, too. I’m pleased to say that while Brazil certainly still has problems to work through, I’m a little more optimistic about the investment prospects there than I was six months or so ago—and that’s partly because everyone else seems so pessimistic! As the late Sir John Templeton once said, “to buy when others are despondently selling and to sell when others are buying requires the greatest fortitude and pays the greatest ultimate rewards.” As contrarian-minded investors, we are looking for individual opportunities in emerging markets that others may be avoiding, but where we think potential lies—including Brazil.
What we see as the key advantages for Brazil
Sources: United Nations, “Recent Macroeconomic Trends in Emerging Economies and Implications,“ February 2014; CIA World Factbook, 2010 data; World Bank, 2013 data.
The press has battered Brazil over the past year for a number of reasons, including criticisms and protests tied to last summer’s FIFA World Cup (mainly related to spending and preparations), a contentious election marked by the death of one of the favorite candidates and a narrow victory for incumbent Dilma Rousseff in October, and recently, a corruption scandal involving a major oil company there. All this is an important reminder of why we believe not only in the value of a bottom-up stock selection process in emerging markets, but also in active management; because we are not tied to a benchmark we can be a bit more nimble. I would note that while we are primarily contrarian, value-driven investors, it doesn’t necessarily mean we automatically buy or add to our positions in an existing stock just because the price has dropped. If we see major problems and don’t see long-term value we will look elsewhere. What it does mean is that we can see beyond short-term market shocks or negative sentiment that drag down the entire market, and focus on the companies we believe will survive and prosper long term. The key is to be patient.
The positive result of market shocks like the corruption scandal in Brazil is that greater transparency and reforms tend to follow. We have been investing in Brazil for decades and have always felt that state-owned companies in Brazil had a poor track record when it comes to corporate governance. We hope that heightened attention on corruption will help ignite management changes at the corporate level, and ignite reforms at the political level. We were encouraged when we learned how the prosecutors in Brazil have been chasing after those suspected of corruption—and taking action. We would note, of course, that Brazil isn’t the only country facing this type of problem; corruption is one of the biggest problems we face as investors around the world—even in the most developed markets.