From Invesco: Brazil has historically been a market of “feast or famine” for investors. This was illustrated once again over the past several weeks as the economic environment changed fairly dramatically in a relatively short period of time. As of mid-July, economists are expecting 2018 gross domestic product (GDP) growth of 1.8%, whereas as recently as May, they were expecting 2.5% growth for the year.1
A short-term strike may have long-term consequences
What’s happened to cause such a shift in sentiment? The most notable incident during the second quarter was the nationwide truck driver strike that began May 21. The strike, which was organized as a protest against high diesel prices, essentially shut down the country as trucks blocked highways and key intersections, and shipments of all types of goods were halted.
Through the end of the second quarter, the MSCI Brazil Index was down 17% in US dollars, with 15% of this coming after the start of the strike.2
The event was short-term in nature, but it has potentially significant long-term implications and leaves Brazil in a more precarious situation. Many people might expect that the general population would be upset by a strike that impedes their ability to get basic necessities like groceries and fuel. In this instance, however, they supported the truckers, which seems to indicate the voting base has grown weary of political reforms. The direction of the country has become cloudy as politicians have become reluctant to discuss reforms, and candidates from the far left and far right have emerged as the front runners for the October presidential election.
In addition, the currency has weakened to 3.86 Brazilian real to one US dollar.3 This is approaching levels experienced in 2015 and 2016, which marked Brazil’s deepest recession in decades. Along with many other emerging markets (Indonesia, Turkey, Argentina, to name a few), Brazil’s central bank is now tasked with defending the currency. With inflation running well below target, they have chosen to defend with swaps as opposed to raising interest rates.
Our exposure to Brazil
Invesco International Growth Fund is currently overweight Brazil compared with its benchmark, the MSCI All County World ex U.S. Growth Index. Over the last six months, however, we have reduced our exposure, with the bulk of our selling completed before the trucker strike.
Our holdings in Brazil are in less economically sensitive businesses, which we view as a positive in this environment. For example:
- B3, the Brazilian stock exchange and registrar, saw its net income grow 36% from 2014 to 2017 — a period in which Brazil’s GDP fell 16% in US dollar terms.4 (B3 represented 1.48% of Invesco International Growth Fund as of June 30, 2018). The business generates a high degree of recurring revenues, and it benefits from the elevated trading volumes that occur during times of market volatility.
- Another one of our Brazilian holdings is Banco Bradesco (1.18% of Invesco International Growth Fund as of June 30, 2018). During the previously mentioned economic slowdown of 2014 to 2017, the bank’s net income grew 14%, and it would have been higher minus some acquisition-related restructuring charges.5The Brazilian banking industry has become more consolidated, and pricing competition has decreased.
As always, our bottom-up EQV process seeks out companies with attractive Earnings, Quality and Valuation characteristics. Explore where we see opportunities in markets around the world.
1 Sources: Brazil Central Bank, Bloomberg L.P.
2 Source: Bloomberg L.P.
3 Source: Bloomberg L.P., July 16, 2018
4 Sources: World Bank, Bloomberg L.P.
5 Source: Bloomberg L.P.
The MSCI Brazil Index is an unmanaged index considered representative of Brazilian stocks.
The MSCI All Country World ex-U.S. Growth Index is an unmanaged index considered representative of growth stocks across developed and emerging markets, excluding the United States. The index is computed using the net return, which withholds applicable taxes for nonresident investors.
Gross domestic product is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.
Holdings listed are for informational purposes only, are not buy or sell recommendations and are subject to change.
Past performance is not a guarantee of future results.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
Invesco International Growth Fund risks:
Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.
Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.
Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.
This article is brought to you courtesy of Invesco.