The Brazilian equity market sold off strongly last week following the claim by a major newspaper that it had obtained a recording of the new Brazilian President, Michel Temer, discussing corrupt practices with a powerful businessman. With another period of political uncertainty ahead and potential for a second impeachment, we outline a summary of our current views in this note.
Our Quality Growth boutique exposure to six Brazilian listed companies in our Emerging Markets strategy, with a combined weight of 11 percent as at week-end 19 May 2017. At this time, none of our Brazilian holdings are banks. As bottom up stock pickers with a quality growth style, our Brazilian investments have been selected due to their individual franchise strength and potential to deliver stable, less cyclical, and predictable growth over the long term. We have not sold any of our Brazilian holdings, nor have we had a change of view on the fundamental value of any of our holdings due to last week’s events.
As long term investors in emerging markets for more than 20 years, we have seen many political upsets. We recognize that macro change, if drastic enough, can cause damage and act as an ‘off switch’ for our investments. We look for red flags such as the potential for sharp changes in regulation or tax structures, as these can damage the long term profit growth of even the best operator. However, we do not see anything to suggest this might be the direction Brazil is heading towards at this moment.
There is always the chance something significant might happen in an economy, and as bottom-up investors we are aware that macro has the potential to damage any top or bottom line if the situation is dire enough. Macro can act as on “off switch”. However, we never view a macro call as enough on its own to justify a buy. We always need delivery of EPS growth to be generated by a business we believe, after deep analysis, can power itself through weak economic times. It is this quality of earnings we rely on to drive returns over long-term holding periods for our investors – and over long holding periods rarely, if ever, does the economy always look attractive. In Brazil, despite the recent political surprise, we do not see anything at this point that we believe might damage the long-term growth prospects, or the market positioning, of the companies we hold. As a result, we maintain our exposure to these well managed and market leading franchises at this time.
Sudhir Roc-Sennett, senior portfolio adviser, Vontobel Asset Management