Mike Simpson, head of Latin American Equities at Baring Asset Management, thinks a change in political leadership would be positive for Brazil.
We have been meeting with company managers in Brazil. Clearly, it has been a timely trip with the country now readying for the probable impeachment of the left-leaning President Dilma Rousseff.
Yet, investor confidence is growing. The Brazilian equity market has rallied this year as one of the top global performers with a return of 34%, compared to 7% for emerging markets and 2% for global equities.
On 17 April, the lower chamber of congress backed the impeachment proceedings against the president.
She has been engulfed in a bribery and corruption scandal centring on Petrobras, the state-run oil company, which she chaired before becoming president.
We may see some political wrangling ensue as the president and the Workers Party try to cling to power, but momentum is building and the fate of her presidency now hinges on a forthcoming vote in the senate.
While impeachment is not yet a foregone conclusion, it seems very improbable that Rousseff will manage to stay in office until the end of her elected term in 2018.
The benefits to Brazil
On the positive side, this could bring an end to the political paralysis and gridlock that has hindered the government for years.
More than this, we think it is likely that new leadership would pursue the structural and market-friendly reforms needed to reactivate business activity.
That would be a stark contrast to the statist policies pursued by Rousseff over the past six years.
In the near term, anticipation of this change is bringing about a significant improvement in investor sentiment.
With the level of perceived risk starting to recede, we are also starting to see the cost of capital come down.
Strategy and outlook
We invest in companies, not economies or governments. Yet, no company operates in a vacuum.
Brazilian companies account for almost half of the exposure in our strategy, with all investments meeting our strict quality, growth and upside criteria.
Banco do Brasil, which we recently added, is the highest quality state owned enterprise in Brazil with a relatively healthy return on equity.
Like other financials that we hold, such as Itaú Unibanco and Banco Bradesco, it has a strong franchise poised for long-term growth and could easily see increased interest from other international investors in this changing environment.
EcoRodovias is another company with a strong earnings outlook.
The company operates motorway concessions on 20-30 year contracts, giving it a degree of protection and the longer term visibility of earnings that we favour.
As a private company, it is helping to fulfil a needed public good after years of underinvestment in motorways by the government.
Lastly, we have also added AES Tiete.
Unusually for a utility, this company meets all of our quality, growth and upside criteria.
In our view, it is best-in-class, run by a credible management team and as a company that pays a comparatively high dividend, it should attract further investor interest as yields come down in the market.
Looking ahead, we are confident our investments can deliver strong performance into the longer term. We think a change in political leadership would be positive for Brazil.
In particular, it would allow the authorities to introduce much needed structural and market-friendly reforms which will benefit investors, and we are positioned for this.