• Fund is buying up bank stocks and shares of car rental company
  • Surge in foreign investment risks fueling a ‘bubble’: Bartunek

One of Brazil’s best performing hedge funds is looking to capitalize on a fledgling economic recovery after reaping lucrative gains by betting on companies that were largely recession-proof.

Constellation Investimentos e Participacoes Ltda., based in Sao Paulo, is now snapping up bank stocks as well as shares of car rental company Localiza Rent a Car SA, which could see a recovery in profit after cutting costs during the downturn and gaining market share from rivals, said chief investment officer and founding partner Florian Bartunek. The Constellation Fund SPC - Equities Class II fund, which invests only in Brazilian equities, has returned 67 percent in 2016, outperforming 98 percent of 302 long-biased peers.

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“There is a lot of spare capacity, so at the beginning of the pickup in the economy companies won’t need to invest a lot, they won’t need to hire a lot of people,” said Bartunek, who along with Rafael Sales and Marcelo Silva manage about $800 million in assets. “We should see margins expanding during the recovery of the economy.”

Brazil’s benchmark stock index has soared 65 percent this year in dollar terms -- the most in the world -- on optimism that Acting President Michel Temer will right an economy mired in its deepest recession in more than a century. And there are signs that things are slowly turning around, with Credit Suisse Group AG raising its 2016 growth forecast last week.

Some of Constellation’s most profitable wagers include those on exchange operator BM&FBovespa SA and health services provider Fleury SA. The companies’ shares have gained 66 percent and 131 percent, respectively, in 2016.

But Constellation isn’t alone in seeing the potential for additional gains in Brazilian stocks. The iShares MSCI Brazil Capped ETF, the largest such fund traded in the U.S., has had $647 million of inflows in 2016, the most since 2011.

The surge in interest from foreign investors threatens to create a “bubble’ in Brazil’s stock market, Bartunek said by phone. Still, he’s bullish as he expects an improvement in companies’ margins and profits. The Ibovespa index is trading at 13.2 times forecast profits, 21 percent above the average of the past five years.

“We could even experience a Brazil bubble, given the scarcity of good ideas and considering that Brazil is still pretty much unloved,” he said. “If there’s no improvement in the economy, maybe Brazil is fairly priced, but if there is an improvement in the economy and in earnings, Brazil is still cheap.”

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