BlackRock Inc.’s Will Landers isn’t convinced Brazil is heading for a rebound anytime soon.
Joblessness will worsen in the next 6 to 12 months, weighing on domestic growth as retailers and banks struggle to deal with the fallout, said Landers, who manages $2.7 billion in Latin American equities. A Labor Ministry report last week showed that Brazil unexpectedly lost jobs in April for the first time on record as the economy heads toward its deepest recession in 25 years.
The figures “surprised a lot of people in terms of how quickly unemployment is starting to become an issue, but we’re at the beginning of that,” Landers said Wednesday in an interview in Sao Paulo. “Most companies I’ve met with in the last week understand that the top line’s not going to be growing so they have to make adjustments in their operating costs and unfortunately that means more dismissals.”
The surge in unemployment comes as Congress acts to limit jobless benefits, sick leave and pension payments. The measures, approved this week in Brasilia, are part of a series of key bills that Finance Minister Joaquim Levy says are needed to avert a credit-rating downgrade and regain investor confidence.
All of this means a tough road ahead for Brazilian stocks, according to Landers, who has been underweight on Brazil since the start of the year. The nation represents less than 50 percent of his holdings.
‘Too Much Debt’
“I don’t want to be involved with companies that have too much debt,” he said. While he likes banks, he said he needs to see how they “really protect themselves from this growth in unemployment that’s coming through. We need to see how the retailers are going to continue to execute in a much tougher environment.”
One industry Landers said he’s “looking at” is homebuilders as deliveries increase, boosting cash flow. Still, revenue will be weaker because of rising interest rates and unemployment, he said. He doesn’t hold any Brazilian homebuilder shares in his portfolios now.
Well-managed companies like Ambev SA remain a defensive investment, he said. When it comes to Petroleo Brasileiro SA, he’s still sitting on the “sidelines,” he said.
“We need to understand how we get that value that was destroyed for shareholders back,” Landers said about the state-run oil producer whose market value plunged $19 billion since March 2014 amid a corruption probe.
In the short-term, politics will be the main driver for Brazilian stocks, he said. With unemployment rising and the economy headed for a deeper recession than previously forecast, it’s still unclear if the government can implement the cuts it needs to shore up fiscal accounts, he said.
“The economy is weaker than everybody expected, so the revenues are weaker than everybody expected,” Landers said. “That means more has to be done on the fiscal side.”