Brazil, of All Places, Is Now a Hot Spot for Many Stock Pickers

  • Among top 10 stock funds, six see opportunities to buy
  • Foreign equity holdings rise $4.2 billion in October

Amid all the doom and gloom over Brazil’s economic and political crisis, a curious thing has started to happen: Investors are returning to the stock market.

Foreigners have poured a net $4.2 billion into local equities in the first 20 days of this month, putting Brazil’s stock market on course for its first positive monthly inflow since June, according to data from exchange operator BM&FBovespa SA. What’s more, asset managers from more than half the top 10-ranked local funds now say they are cautiously buying again, a reversal of their tack earlier this year, when they were dumping stocks in favor of cash-like holdings pegged to short-term interest rates.

Source: Bloomberg

While still far from a consensus view, these bargain hunters join a growing chorus of investors -- including the likes of Mark Mobius, chairman of Franklin Templeton’s emerging-markets group and Solitaire Aquila Ltd. portfolio manager Patrik Kauffmann -- who have said in recent weeks that they’re looking to buy discounted assets in Latin America’s largest economy. The benchmark Ibovespa index trades at 1.15 times book value, or assets after subtracting liabilities, according to data compiled by Bloomberg. That’s a little more than half the average of global shares.

“There’s no bell that rings when you reach a turning point in a bear market,” Guilherme Ache, who oversees 5 billion reais ($1.28 billion) as a partner at Squadra Investimentos, said in an interview at his office in Rio de Janeiro. “But anyone buying a selective portfolio at current levels will make money.”

“Selective” is the key word, he emphasized. Bottom fishers need to be picky and maintain a long-term view, Ache said, as a sweeping corruption scandal and political turmoil that’s bolstering calls to impeach President Dilma Rousseff threaten to exacerbate a recession that’s already forecast to be the longest since the Great Depression.

Squadra’s Master fund ranks second among Brazil’s best-performing equity funds this year, according to data compiled by Bloomberg. In interviews with eight of the top 10 funds, five other managers echoed Ache’s cautious optimism.

That’s helped fuel a 5.9 percent gain in the benchmark Ibovespa index this month, paring the year-to-date loss to 4.6 percent. Factoring in the currency’s 32 percent decline, the index is down 34 percent in dollar terms this year. The gauge fell 0.1 percent to 47,719.98 at 4:08 p.m. in Sao Paulo.

In September, the iShares MSCI Brazil Capped ETF, the biggest Brazil exchange-traded fund in New York, posted its first monthly inflow since February.

"Some things are cheap, but we’re raising our positions cautiously, because the political scenario is very unpredictable," Beatriz Fortunato, a partner at Studio, which oversees 400 million reais and manages the No. 5-ranked fund, said from Rio de Janeiro. "Our strategy values quality companies, which have better conditions to face bad times."

Studio has increased its equity holdings by 10 percent in the second half of this year, adding companies including power utility CPFL Energia SA and bus-maker Marcopolo SA.

There are still plenty of naysayers swearing off Brazilian equities after this year’s tumble. Two of the top 10 funds say that while valuations are attractive, the risk is still too great that Brazil’s messy political situation could torpedo any gains to be had.

“The return has to be very attractive to justify acquisitions at a moment of such uncertainty,” said Alexandre Rezende, who helps oversee $1 billion as a partner at Rio de Janeiro-based Oceana, manager of the No. 8-ranked fund. “We don’t see any reason to do that if we can safely invest in government bonds,” which yield as much as 15 percent.

More than two dozen petitions have been filed to impeach Rousseff, adding to political instability that has paralyzed Congress, rattled financial markets and deepened an economic slump. Fitch Ratings on Oct. 15 cut the nation to the cusp of junk, the fourth downgrade under Rousseff’s watch. Gross domestic product is forecast to shrink 3 percent this year and 1.2 percent in 2016, according to economists in a central bank survey released Monday. It expanded only 0.2 percent last year.

It’s precisely this kind of bleak scenario that lures James Gulbrandsen, a partner at Rio de Janeiro-based NCH Capital, which manages $3.2 billion in assets. All six of the managers hunting for bargains say they are stocking up on shares they already own: lenders Itau Unibanco Holding SA and Banco Bradesco SA, credit-card processor Cielo SA, insurance company BB Seguridade Participacoes SA and drugstore chain Raia Drogasil SA. Clothing retailer Lojas Renner SA, brewer Ambev SA and power utility Equatorial Energia SA -- all of which have rallied this year -- are also among their favorites.

"This is the best time to buy in years," Gulbrandsen said.

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