Brian BollenCurrent stock market weakness in Brazil has created opportunities to buy good companies that were previously too expensive. So says a senior portfolio manager at NN Investment Partners, a self-styled equity emerging markets boutique.
Ivo Luiten commented: “In line with our investment philosophy, we see the current market weakness as an opportunity to initiate more positions in good companies that were previously very expensive and now trade at more reasonable valuation levels.”
NN IP says that its Latin America fund and its two GEM funds are defensively positioned within Brazil. They have an overweight position in well-managed, financially healthy companies.
They also have an underweight position in the cyclical banks and are invested in exporters that benefit from currency weakness.
Notes on a scandal
- MSCI Brazil dropped 15% in US dollar terms on 18 May
- President Temer implicated in corruption scandal
- News reversed market outperformance gains
“Mr Temer has been the driving force behind Brazil’s reform agenda,” adds Ivo Luiten. “Any news that compromises his position will be used by other political parties to withdraw support for these unpopular reforms or even initiate another impeachment process.”
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More downside if no reform
If there are no reforms, there is more downside to both the domestic stock market and the currency, he argues. How much more is hard to tell because it depends to a large extent on how future politics will evolve.
Also, commodity prices have been recovering over the past year and Brazilian corporate earnings were rising for the first time since 2011, he comments. This should give support to the market and prevent the index to decline to the trough level seen during 2016 Q1.
