Luiz Inacio Lula da Silva, Brazil's former president, at a news conference in Sao Bernardo do Campo, Brazil, on March 10, 2021.
Victor Moriyama/BloombergThings look pretty bad for Brazil. The so-called Manaus variant has brought coronavirus back with a vengeance. And Lula is loose. Leftist ex-president Luiz Inacio Lula da Silva stepped out of jail last month after courts essentially annulled his corruption conviction, and looks set to challenge incumbent Jair Bolsonaro in October 2022.
All of which means it may be time to buy. “I’d be surprised if things are not looking better a month from now,” says Verena Wachnitz, a portfolio manager for Latin American equities at T. Rowe Price.
The iShares MSCI Brazil exchange-traded fund (ticker: EWZ) has fallen 7% this year, while global emerging markets advanced 5%. That makes Brazil the third-cheapest emerging market after Russia and Turkey with an average price/earnings ratio of 9.2, calculates Alex Altmann, head of equity trading strategy at Citi. “Assuming that virus cases once again appear to be peaking, Brazil begins to look quite interesting,” he says.
That assumption is reasonable, adds Malcolm Dorson, Latin American portfolio manager at Mirae Global Asset Investments. Bolsonaro’s noisy virus skepticism delayed Brazil’s vaccination launch. But an underrated national health service can rapidly accelerate. “The system can handle 2 million shots a day,” he says. (They are at around 600,000 now.) “That’s the best in all emerging markets.”
The Bolsonaro-Lula fireworks have distracted from quieter political progress. Congress rather deftly compromised between pandemic stimulus and longer-term debt worries, Wachnitz says. It extended the so-called coronavoucher program of cash transfers for four months in exchange for more rigorous fiscal controls going forward.
The central bank hiked interest rates by 0.75 percentage points on March 1, after flirting with negative real rates. That should bolster a currency that has slid 5% this year even as prices for Brazil’s commodity exports rallied, says Tony Volpon, a former central bank governor and now chief strategist at WHG in São Paulo. “The real effective exchange rate is its cheapest since 2002, when we had a political crisis and no reserves,” he says. “Now we have $300 billion.”
Volpon is also relaxed about Lula, who held power from 2003-2011, getting another shot at age 76. “Lula was really a center-left [Bill] Clinton-[Tony] Blair kind of guy,” he says. “Brazil achieved its investment-grade rating under Lula.”
Brazil’s market offers various strategies for betting on recovery. Dorson favors steady, established consumer names like pharmacy chain Raia Drogasil (RADL3. Brazil) and department store operator Lojas Renner (LREN3.Brazil). Both stocks have held about even through the first quarter selloff.
The country is rich in fallen tech angels that could bounce on improved global or local sentiment. Payments providers Stone (STNE) and Pagseguro Digital (PAGS) have both lost a quarter of their value since mid-February. E-merchant MercadoLibre (MELI) and Locaweb (LWSA.Brazil), the Go Daddy of Latin America, have crashed almost as hard.
State-owned oil champion Petroleo Brasileiro (PBR) is an idiosyncratic recovery bet. The company’s shares have plunged 23% since Feb. 22, when Bolsonaro fired its CEO for daring to raise fuel prices in line with crude oil. Crude has held steady near three-year highs since then.
Brazil is a volatile place where good news might not last long. Bolsonaro could respond to the Lula challenge by “going populist” and blowing out the budget, Dorson says. Election fever, and spending, is likely to grip the nation by this time next year. But a lot of bad news is priced in.
Corrections & Amplifications
Tony Volpon is a former central bank governor and now chief strategist at WHG. An earlier version of this article incorrectly spelled his last name as Wolpon.
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