Over the past few months, the Brazilian market has benefited from an influx of foreigners that was motivated not so much by the country’s merits, but by a greater relative attractiveness compared to peers, with the Russian invasion of Ukraine and the economic slowdown in China. .
The assessment is by Eduardo Figueiredo, investment director of the global manager abrdn, with around US$ 469 billion (R$ 2.4 trillion) in assets under management.
He states that fiscal discipline from 2023, and institutional stability, are among the main aspects on the radar of foreigners who will dictate capital flows to the region.
“The actors are already known, but the characters are not yet. What I mean is that investors have already dealt with the two candidates at the forefront in the polls. But the attitude they will adopt is still unknown”, says Figueiredo.
According to him, foreigners still see Brazilian assets as highly discounted. Added to this attraction are the doubts of many investors about investing in Asia due to the Chinese scenario.
“Brazil is a large, liquid market where you can express a more positive view of cyclical sectors, such as commodities and energy. Of course, as elections get closer, they become more important and start to get on the radar. But, given the levels of valuation that the Exchange was at, it had a very large risk premium that, at the end of the day, justified this movement of foreigners’ entry”, he says.
The factors that foreign investors will monitor to decide whether to make a more structural allocation in Brazil are the same, regardless of the candidate, because the actors are already known, but the characters are not yet. What I mean is that investors have already dealt with the two candidates ahead in the polls. But the posture they will adopt, both in a reelection scenario, or in the return of former President Lula, is still unknown. As these doubts become clearer in the run-up to and after the elections, then investors will be able to take a slightly clearer stance.
Focus of attention of foreigners
Fiscal discipline is super important to have a clearer view of what the fair discount rate for the country is, in view of the health of public finances.
Respect for contracts with the private sector and stability in the regulatory environment will dictate the attractiveness of some sectors, such as state-owned companies, infrastructure companies, public utilities, such as in the sanitation area. Institutional stability, from the point of view of trust in institutions, and the perception of respect for compliance with respect to corruption, are also very important aspects.
This is what will dictate how much of this capital that we have seen coming in in recent months will become permanent, and even attract a more structural allocation from foreign investors. Even because, what we saw in the flow to Brazil this year was not necessarily Brazil’s merit, it was more a relative merit, due to the position that the country placed itself in relative terms versus its peers.
Given the environment that we have of uncertainty regarding the economic scenario, and also electoral and political, we prefer to have companies in domestic sectors that depend very little on regulation and even on economic cycles, such as, for example, RaiaDrogasil. It is a quality business, with growth potential regardless of what happens to the economy in the medium term.
We also have Totvs, which operates in the software segment for small and medium-sized companies and has a very large scope for expansion, with increased market share and consolidation in the sector, without necessarily needing a market cycle in its favor.
We also like Brazilian banks, which we believe have very discounted valuations and are relatively resilient, especially Bradesco. In the infrastructure segment, we like companies like Rumo, which benefit from longer cycles of investment in the economy and demand for commodities.
Since the beginning of the year, we have favored companies with the ability to pass on prices and with greater inflation protection. This is the case of companies such as Arezzo, which operates in the high-income consumer segment, or Multiplan, in the shopping mall sector, which we see with attractive valuations and which provide a more defensive positioning in relation to the economic scenario.
X-ray | Eduardo Figueiredo, 36 years old
Eduardo Figueiredo is an investment director and is responsible for the stock analysis area at abrdn in Brazil, where he has been since 2011. Before that, he worked for five years at Mauá Investimentos, as a variable income manager and analyst. He has a degree in business administration from FAAP (Fundação Armando Alvares Penteado).