The love for Brazilian equities seems to be fading.
Local stocks have seen strong foreign outflows in recent weeks after the year started off with net inflows of 9.55bn reais ($2.9bn) in January. The year-to-date net balance is now positive by 1.35bn reais, compared with 4.5bn reais in the same period a year ago.
Latin America’s largest economy may be recovering from its worst recession and corporate results reflect that improvement, but other issues remain. Concerns over a faster pace of US rate hikes and increased geopolitical tensions are among the main risks abroad.
“We see a balance between continued economic and earnings recovery on one hand offset by more expensive valuations, political risks and global uncertainties on the other,” says Bradford Jones, who manages the Latin American Opportunities Fund at Sagil Capital. Sagil has reduced its overweight position on Brazil as valuations have become less attractive. “We are still positive on particular companies and industries where we see decent upside.”
Profit-taking also plays a role, as does a contraction in commodity prices, said Alan Alanis, managing director and head of Latin American Strategy at UBS Group AG.
The index “has delivered the top performance year-to-date among major equity markets globally and remains the only one with a double-digit rise of 10.2%,” Alanis wrote in an e-mail.
Brazilian assets across the board are likely to face more volatility as elections approach, said Simon Quijano-Evans, emerging-market strategist at Legal & General Investment Management, which has about £200bn ($280bn) under management.
“In the meantime, it’s the private sector that is keeping the economy going and trying to put aside the political noise,” Quijano-Evans said.
To Blackrock’s Will Landers, investor fears of political uncertainty is an opportunity to buy. He says about 66% of his $2.5bn portfolio is allocated in Brazil. Today’s outflow should become future inflows after the presidential election and further impulse the Ibovespa, he said.
Eurasia’s Christopher Garman recently told Bloomberg that there’s relative complacency in financial markets regarding the electoral risk in Brazil, on the presumption that a market- friendly candidate – like Sao Paulo Governor Geraldo Alckmin – will win. It’s a risky proposition, he said.
“I don’t think blindly buying Brazil right now makes sense,” said Aaron Visse, an emerging-market portfolio manager at Salient Partners, which oversees $14bn.
Be stock-specific, Visse said. Cia de Saneamento do Parana is the biggest value name he sees, and corrections in EcoRodovias Infraestrutura e Logistica SA and CCR SA are buying opportunities.
“Nothing to do with macro, they are simply priced for far too much bearishness,” Visse said.
Investors will be more selective, said Morgan Harting, a New-York based money manager at AllianceBernstein LP. “We’re seeing earnings recovery in sectors like utilities and energy, which have been rising by 80% or more. But other sectors like consumer staples have seen earnings declines.”
A visitor views the electronic board displaying stock activity at the Brasil Bolsa Bacao (B3) stock exchange in Sao Paulo (file). Latin America’s largest economy may be recovering from its worst recession and corporate results reflect that improvement, but concerns over a faster pace of US rate hikes and increased geopolitical tensions are among the main risks abroad.
