Follow up to our outlook on Brazil

Greg Dean's picture

Several months ago Brandon and I returned from Brazil and discussed our excitement at the investment landscape that we saw emerging in the region at the time. You can read that piece here. While it was unpopular and definitely came with its share of uncertainty, we believed the country offered very compelling risk-reward over the long-term for those willing to be patient and ready to act when the stocks we wanted to own hit the prices we wanted to pay. We operated with the belief that we weren't betting on an improving economy or a solution to Brazil’s political impasse in order to make money. Those were just nice to haves on top of our base case. We came home with a number of companies that were very much in control of their own destiny. All are well managed and run by individuals who had handled this type of inflationary low growth environment many times before.

The reason for the update is much to our (pleasant) surprise. Many of these investments have been our best over that time frame as Brazil's stock market has recovered nearly 25% YTD and are up over 40% from the lows in early February. This recovery was much faster than we anticipated and we have begun to reduce many of those positions given the re-pricing. This also supports the fact that you achieve your best returns when other investors are scared and you are willing to do your own work while being patient and not overpaying for a company.

The chart below, I believe, speaks to this effect far better than I can. It depicts the credit outlook in the country as told by the rating agencies. It looks at the number of companies receiving a credit upgrade or downgrade and it is not a surprise to us that the output is very counter-intuitive.

One would think 2011 was the best time to spend money investing in Brazil and 2015/2016 would have been the worst when the exact opposite was actually the case. When everyone sees a company/country/sector with rose-coloured glasses, it is typically time to move on. When things appear most dire (10x more companies seeing its credit downgraded to upgraded) that’s when we get excited and go hunting for opportunities.

Ratio of Brazilian companies receiving credit rating upgrades to downgrades:









Source: Bloomberg

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