Denmark, Intermediary
Changechevron_rightSustainable Investing
Stewardship Principles
Investment Solutions
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Our emerging markets (EM) equity team recently conducted a detailed country-specific review of Brazil that yielded some interesting and potentially actionable investment insights.
My bottom-line conclusion is a bullish one: I think Brazil’s market may offer an attractive path to potentially benefit from some of the country’s macroeconomic trends — particularly disinflation — in the period ahead. I believe now is an opportune time for EM equity investors to consider implementing or augmenting portfolio allocations to Brazilian equities.
Brazil weathered a strong and early inflationary cycle (relative to the rest of the world) that started in early 2020. The country has since experienced rapidly declining inflation, even as many other nations globally continue to grapple with reining in their persistently high rates of inflation (Figure 1). Falling inflation in Brazil may encourage downward pressure on interest rates, providing a catalyst for rising consumer spending and investment, all of which could be tailwinds for its equity market performance going forward.
On the interest-rate front, Figure 2 shows that Brazil’s real (inflation-adjusted) rate has room to come down, as it remains sharply elevated versus key EM and developed market counterparts. This stubbornly high real rate illustrates that Brazilian monetary policy has been meaningfully tighter than that of most other countries in recent years, the effects of which are now becoming apparent as inflation cools. Brazil has historically tended to run high positive real rates but typically closer to 4% (as compared to today’s 8%-plus level), so normalization of that number and continued disinflation should combine to bring interest rates down.
Looking ahead, I expect the Central Bank of Brazil to eventually undertake a concerted rate-cutting campaign that could provide a material boost to many Brazilian equities. This has often been the case in the past, although direct comparisons with previous cycles are difficult. Brazil’s high rates have precipitated a pronounced shift in investor inflows from equity to debt assets. As a result, Brazilian equities now appear quite cheap versus their own history and relative to the broader EM equity category (Figure 3). Once interest rates start dropping, investor capital may flow back into equities.
Along with the usual warnings and caveats that should accompany any call to invest in EM equities (greater market volatility, global currency issues, etc.), the main risk here is probably Brazil’s fraught, uncertain political landscape. Market sentiment and inflation expectations can turn quickly based on policy decisions, especially the Brazilian government’s ability to appropriately manage its finances. However, for discerning longer-term EM equity allocators, I believe Brazil offers a distinct investment opportunity at the present time.
Expert
Reasons for optimism about Indian equities
Continue readingChinese equities: Pockets of strength for patient stock pickers
Continue readingAsia: A growth story with longer-term momentum
Continue readingEM equities: Can they prove the doubters wrong?
Continue readingIndia equity's improving risk/return tradeoff
Continue readingURL References
Related Insights
Stay up to date with the latest market insights and our point of view.
You've been subscribed
Thank you for subscribing. You can manage your subscription using the links provided in any of our subscription emails.
Reasons for optimism about Indian equities
Our experts explain why, despite criticisms that Indian equities trade at higher valuations today than they have historically, they may have the potential to help drive total returns over time.
Chinese equities: Pockets of strength for patient stock pickers
Portfolio manager Bo Meunier explores how China’s recovery may be more modest than headline numbers suggest and why, as a stock picker, she remains constructive.
Asia: A growth story with longer-term momentum
Is China’s recovery already running out of steam? Macro Strategist Santiago Millán assesses the outlook for China and Asia and sees longer-term momentum for growth.
EM equities: Can they prove the doubters wrong?
Multi-Asset Strategist Adam Berger offers six reasons that EM equity performance could be much more compelling in the decade ahead, from attractive valuations to economic tailwinds to mean reversion in the US dollar.
India equity's improving risk/return tradeoff
This is not your grandfather's India equity market. Equity Portfolio Manager Niraj Bhagwat and Investment Director Philip Brooks explain why and back their argument with risk/return data.
Emerging markets health care: Ready for takeoff?
Global Industry Analyst Sue Su shares her sanguine outlook on the health care sector in emerging markets, especially in China, which represents the largest opportunity in this space.
By
The allocator’s perspective: three key decisions on EM equities
How can investors best access opportunities within an improving outlook for emerging market equities? Natasha Brook-Walters, co-head of iStrat, shares three key decision points for allocators.
India: Structural tailwinds for 2023 and beyond
Following his recent trip to India, Macro Strategist Tushar Poddar shares why he's very positive on the country's medium- to longer-term structural outlook.
Why investing in themes for EM equities may reap rewards
Portfolio Manager Dáire Dunne outlines why he is increasingly optimistic about the potential opportunities within select EM equity themes this year.
China internet: Identifying opportunities amid economic reopening
China’s re-opening and economic recovery from its zero-COVID policy has bolstered our optimism in Chinese internet companies.
By
China equity in 2023: Year of the stock picker
Despite the potential risks of investing in China equity, Equity Portfolio Manager Bo Meunier believes there are attractive opportunities for patient, discerning stock pickers.
URL References
Related Insights
© Copyright 2023 Wellington Management Europe GmbH. All rights reserved.
WELLINGTON MANAGEMENT FUNDS ® is a registered service mark of Wellington Group Holdings LLP.
Wellington Management Europe GmbH. Registered office: Bockenheimer Landstraße 43-47, 60325 Frankfurt am Main, Germany. T: +49-69-677761-500. VAT-number DE 326304943 (Umsatzsteuer-Identifikationsnummer) Commercial Register of the local court Frankfurt am Main (Handelsregister des Amtsgericht Frankfurt am Main), HRB 115460 .
Wellington Management Europe GmbH, is authorised and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht)
For professional investors and intermediaries only. This content is not suitable for a retail audience.
we’d love your feedback!
Help us improve our website. For every short survey taken, we give 2 to the Wellington Management UK Foundation to support educational charities helping economically disadvantaged children in EMEA.
