By Ana Carolina Siedschlag
Investing.com - Just like almost everybody else in the world, Brazil has been struggling to pace itself out of the pandemic. With rising numbers on daily deaths caused by Covid-19 and a public debt that skyrocketed during 2020, the biggest country in Latin America might not be the very first choice when it comes to international investors looking for safety.
But these trying times appear to be shedding light in some not-so-hidden opportunities. In a country with a 210 million population that lacks from roads to ports and it’s experimenting on financial deepening and e-commerce, there’s room for everything. And this in a market that just found out that it could lead its continent into an ESG focused corporate world.
“We shouldn’t waste a crisis”, said Gustavo Stenzel, Director of LatAm Strategy at Franklin Templeton Emerging Markets Equity, in an interview with Investing.com. For him, financial inclusion, technology disruptions and the rising of digital services during the pandemic made Brazil an even more interesting opportunity that can’t be ignored.
This week’s auctions promoted by Brazilian government could be a test on international appetite, remarks Stenzel. The “Infra Week” will be a series of concessions sales aimed to attract local and foreigner investors interested in huge infrastructural projects in the country.
The first round this Wednesday (7), that included 22 airports in 12 different states, attracted R$ 3.3 billions (US$ 586 millions), 3,822% above what the government was aiming at. It included bids from the Brazilian company CCR (SA: CCRO3 ), as well as the French Vinci Airports and the Spanish Aena (MC: AENA ).
“There's a very wide range of investment opportunities, it's big and liquid. Compared to the region and to many other Emerging Markets, Brazil is definitely one country that we should look at,” said Claus Born, Institutional Product Specialist at Franklin Templeton, to Investing.com.
Check out the whole interview with the Franklin Templeton’s analysts:
Investing.com: In the last couple of weeks we have seen optimistic economical data in some developed countries, especially in the U.S. At the same time, countries like Brazil are struggling to control the pandemic, in a scenario of already super increased public debts. Are Emerging Markets countries going to lack behind this recovery?
Gustavo Stenzel: All countries increased their debts. Countries like Brazil are more concerned because they’ve always been concerned about it. But all the countries did the same. The main thing is that we shouldn't waste a crisis. If there's a lot of debt, maybe the reforms will come faster. Brazil has a lot of assets to be sold that could reduce it and there was an agenda about it, but it was disappointed because of the pandemic. We were expecting more privatizations, faster concessions, and we had some, but were still lagging behind.
Claus Born: Probably the big amount of debt will have to keep interest rates low and have governments supporting it. To have a dramatic interest rate increase would make the situation very difficult and this is not only in Brazil, but globally.
Investing.com: Having low interest rates for longer could also keep supporting the swift in investments from fixed income to stock markets. What are your views on this financial deepening for these countries?
GS: Low interest rates make stocks much more attractive than what investing in bonds looked like in the past. There is also the fact that people are at home and have more time to reach out to this information. Access to the markets is also easier through apps and specialized websites. This is something that we can see all over the world, but it’s happening especially in Emerging Markets.
CB: The one big benefit is not only for the investors but also for companies, because they can go to stock markets now to find capital, instead of depending on governments. And for the investors it means that they have a much more diverse portfolio in the long term and they can participate in the growth of companies, which is a completely different experience than just sitting on a bond and waiting. It's much more dynamic and it helps to build a healthier cooperative environment.
Investing.com: What advantages do Emerging Markets get from this swift in financial inclusion?
GS: There are two interesting things. There's no more competition from government banks. In Brazil, for example, public banks lending used to be 55% of the total amount of loans, but now it has dropped to 45%. The other thing that happened throughout all South America is that a lot of the handouts during the Covid-19 were given to people that didn't even have bank accounts. The penetration of financial services is reaching people that were invisible to the system before. That's very exciting because one thing that Latin America has always lacked behind is credit offer. Companies can’t rely on the governments to land to them, and they had people wanting to do that. It was a perfect combination. And at the same time technology conducted that. Brazil is leading the way in the region, with 3 million people that are now involved in stock markets, while Mexico is only 300.000. They are catching up though.
Investing.com: Is Latin America also catching up on the ESG issue?
GS: Europe was already very demanding on the ESG issue and now the U.S. is joining them. It started with pension funds and it's triggering down to get other investors. Latin America has the same pace, pushed by institutional investors and also people interested in ESG sustainability funds.
CB: Companies are catching up very fast. The stock exchange in Brazil, B3, has been promoting sustainability for a long time already, not only as a company but also to trigger the whole market. It's an example of a leading listed company that has taken specific measures in terms of ESG. It's something that you wouldn't expect from an Emerging Market country company.
Investing.com: Is this being applied to the three letters of the ESG concept - environmental, social and corporate governance?
GS: For us investors, the G has been very active for many years now, through electing board members or engaging with the companies. But in the environmental and social segments it was harder for us to engage. We rely a lot on the own companies reports. So that is an extra push for them to be more transparent. But the interesting thing is that it is also a push on the financial side, because now they can issue a ESG bond if they comply with certain rules. It's a very curious turn that ESG is taking, being not only mandatory, but also a financial incentive.
Investing.com: Besides catching up in the ESG department, what are other opportunities that investors should look at when thinking about investing in Brazil?
GS: The good thing is that we are in a sweet global spot right now. Interest rates are low everywhere. Whatever we auction, for example, might have a huge attention. Last year, the auction of the sewage services in Maceió [Alagoas state capital] had a minimum bid of R$ 15 million [US$ 2.7 million]. The company that won, with a Canadian fund behind it, bidded R$ 2 billions [US$ 360.7 millions]. It's an amazing demand for everything that Brazil has to sell. The currency is one of the pick up sides for international investors. The other are secular tendencies, like bankarization, technology disruptions and the beginning of e-commerce. Brazil is one country with 210 million people, it's very hard to achieve a consumer market as big as this one, with infrastructure gaps and low interest rates. There are a lot of angles that are interesting.
CB: If you look from an international investor perspective, it's a relevant and very diverse stock market, especially after two big waves of IPOs. There's a very wide range of investment opportunities, it's big and liquid. Compared to the region and to many other emerging markets, it’s definitely one market that we should look at.
Investing.com: What about the challenges?
GS: Debt is a growing problem that we still haven't seen a clear long-term outlook. And it basically means the size of the government. They've been working on that but still not enough to change the scale. I think that that's definitely the biggest concern. The slow pick up of employment rates is also a problem. Without the services sector coming back, employment will still struggle. And also the consumer confidence needs to come back with the reform agenda and sustainability of the debt level.
What the government will do about it is a little bit unpredictable because it has to deal with different forces. People at the market always think that things should move faster and some believe that aggressive changes might come only after the 2022 elections. I think that some reforms could come before that.
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