Many investors in Brazil, including us, have been a little frustrated over the past couple of years with its lack of growth and progress. Gross domestic product (GDP) in Brazil grew a mere 0.2% in 2014 (estimated), a far cry from the 7.5% it saw in 2010.1 However, we believe Brazil has all the elements in place to achieve much higher rates of growth if the political will is there.
My team and I traveled to Brazil in February to take a pulse-check of the business and economic environment there. We also had a chance to enjoy some post-work festivities at Carnival, where we could see the mood of the people there, too. I’m pleased to say that while Brazil certainly still has problems to work through, I’m a little more optimistic about the investment prospects there than I was six months or so ago –Â and that’s partly because everyone else seems so pessimistic! As the late Sir John Templeton once said, “To buy when others are despondently selling and to sell when others are buying requires the greatest fortitude and pays the greatest ultimate rewards.” As contrarian-minded investors, we are looking for individual opportunities in emerging markets that others may be avoiding, but where we think potential lies –Â including Brazil.
Some key advantages for Brazil
- It’s the seventh-largest economy in the world by GDP; sixth by population.
- Since 2003, some 36 million people have risen out of poverty and joined the ranks of the middle class.
- Demographic trends appear favorable, with a median age of 30.7 years.
- Brazil’s unemployment rate dropped below 5% in 2014, an historical low.
- It has a diverse economy with a wide range of natural resources.
- Education has been seen as a top priority; literacy rate is above 90%.
Sources: United Nations, “Recent Macroeconomic Trends in Emerging Economies and Implications,“ February 2014; CIA World Factbook, 2010 data; World Bank, 2013 data.
The press has battered Brazil over the past year for a number of reasons, including criticisms and protests tied to last summer’s FIFA World Cup (mainly related to spending and preparations), a contentious election marked by the death of one of the favorite candidates and a narrow victory for incumbent Dilma Rousseff in October, and recently, a corruption scandal involving a major oil company there. All this is an important reminder of why we believe not only in the value of a bottom-up stock selection process in emerging markets, but also in active management; because we are not tied to a benchmark we can be a bit more nimble. I would note that while we are primarily contrarian, value-driven investors, it doesn’t necessarily mean we automatically buy or add to our positions in an existing stock just because the price has dropped. If we see major problems and don’t see long-term value, we will look elsewhere. What it does mean is that we can see beyond short-term market shocks or negative sentiment that drag down the entire market, and focus on the companies we believe will survive and prosper long term. The key is to be patient.
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