Paris-based emerging market investment firm Gemway Assets keeps a light overweight position on Brazil after Brazilian president Michel Temer was named in the Lava Jato corruption case on 17 May 2017.
Temer has stated that he will not step down. The Brazilian market faced huge losses on 18 May then experienced a shy rebound.
Gemway Assets observed that political uncertainty is back and that much can happen by next Brazil’s general elections that will be held in October 2018.
“The vote on the pension reform that was priced as successful and to be done in coming months by the markets, now is less certain, both on timing and on the support it can get from the Congress,” explained Bruno Vanier, portfolio manager of the GemEquity fund and chairman of Gemway Assets.
GemEquity was slightly overweight on Brazil prior to the events (8% vs 7% in MSCI EM). Vanier said the portfolio is not invested in political stocks such as banks, Petrobras or JBS.
“Given the prospects of the economy and corporate earnings, we decided to keep our light owerweight position,” the fund manager argued before putting forward four key points.
“1/ The real activity has been stabilising following 3 years of decline: the GDP contracted by over 8% in real terms since 2014 and has been slightly rebounding over the last quarter.
“2/ Q1 17 earnings season was healthy with 40% of companies releasing better than expected numbers. During the tough times, most of them focused on cost efficiency programs hence margins started to recover. In our portfolio, Localiza (2.3% of Gemequity) earnings beat estimates by +6%; Hypermarcas (1%) by +5%, Energisa (0.8%) by 11%, while WEG (1.4%) published better margins even though hurt by stronger BRL yoy (as half of the business is done outside of Brazil).
“3/ Inflation surprised positively in Q1 17 (4.1% vs. 4.5% target by BCB). And the market started to price a more dovish monetary policy with some forecasts as low as 7.5% by 2017 year end (vs. 11.5% today). Now the path of the decline might be reviewed as the inflation is very much dependent on BRL moves.
“4/ Investors positioning: international investors have been mostly neutral on Brazil and on 18 May were very active trading the currency. Local pension funds are very much underweight.”