Top Brazil Funds’ Contrarian Bet: Ignore Economy and Buy Stocks

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Brazil’s two biggest mutual funds have a message for longer-term investors that few in the recession-plagued country seem to want to hear: Now is a good time to buy stocks.

BB DTVM and Itau Asset Management, which combined oversee almost 1 trillion reais ($330 billion) in multi-asset investments, point to cheap prices in dollar terms, a weak local currency that’s fueling exports and prospects government spending cuts will stave off a credit-rating downgrade to junk. While the Ibovespa has been rallying recently, the increase is largely explained by foreign stock-buyers as locals sit on the sidelines.

In the short term, almost everything still suggests investing in fixed income is the smarter bet. Inflation-adjusted interest rates are the highest among Group of 20 countries, and analysts are cutting earnings forecasts for Brazilian companies more than in any major market in the Americas. Take a longer-term view, though, and stocks are beginning to look attractive again, said BB DTVM and Itau Asset Management.

“The stock exchange could be a good surprise,” Carlos Takahashi, the chief executive officer of BB DTVM, said May 6 in an interview at Bloomberg’s Sao Paulo office. While he’s recommending shares to clients, it hasn’t translated into a major increase in holdings, he said. “It’s a tough task trying to convince investors that now could be an interesting time to diversify a little bit more.”

Locals vs. Foreign Buyers

Brazil’s Ibovespa index has already started to rally, posting a 14 percent gain in the past two months. It gained 0.4 percent Friday. Petroleo Brasileiro SA, the heaviest-weighted company in the index behind Itau Unibanco Holding SA, is rebounding after posting long-delayed results and replacing its top executives.

Retail investors have accounted for less than 15 percent of trading in the Brazilian exchange for the past eight months, ending 2014 with the lowest share since 1998. Foreigners have picked up the slack. Exchange data show they were responsible for more than 51 percent of trading last year, the highest share since at least 1994.

It’s not hard to see why many Brazilians are hesitant to jump back into a stock market that is down 17 percent since the start of the decade. Economists in a central bank survey published May 4 are forecasting a GDP contraction of 1.18 percent this year, and policy makers said in minutes released Thursday that inflation, already at an 11-year high, will quicken in the short term.

Sweeping Scandal

Add to that a sweeping corruption scandal at oil giant Petrobras that has paralyzed credit for builders, halted some infrastructure projects and boosted unemployment. President Dilma Rousseff’s approval rating was at a record low 13 percent in an April 9-10 survey conducted by polling firm Datafolha.

In this scenario, “equities are not going to be the favorite -- but it’s cyclical,” Itau Asset Management’s CEO Gustavo Murgel said in an interview in Sao Paulo on May 6. In dollar terms, stocks are near a multi-year low, he said. “So we’ve seen -- and we’ll probably continue to see -- some interest in Brazilian equity markets.”

What’s behind the rosier outlook for stocks isn’t today’s economic snapshot -- which Takahashi and Murgel both agree is dismal. It’s the outlook for 2016 and beyond, they said. And by that measure, the picture is improving.

Finance Minister Joaquim Levy, who took over in January to shore up public accounts and avert a downgrade, scored a victory May 6 when Brazil’s lower house passed his proposal to cut labor perks.

“Some would argue that you may have a contraction in the short term, but if measures are approved, if you have a successful implementation of this plan, you may recover investments and confidence,” Murgel said. “When we have a clear sign of a stable financial situation, it makes everything better.”

For more, read this QuickTake: Brazil's Highs and Lows

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