Investment in Brazil: Brazilian Market Outlook 2012

Interview with Luiz Fernando Figueiredo, Founding Member of Mauá Sekular Investimentos

The strategic objective is to turn Brazil into the fifth largest economy in the world. The government wants to maintain a significant annual economy growth rate, to reduce social inequality, to ensure strength in the middle class. Those are ambitions which could place Brazil in a prominent global position and they are very brave, given the current deficit of 2.3% in the GDP that Brazil had running in the first half of this year. Also, the investment in the Brazilian stock market has fallen off 17%. The Central Bank has cut the country’s interest rate to 12%. Those are all challenges for the economy. Can you tell us about the outlook of the economy?

Let us talk about today, but by comparing it to what we had in 2008, because there are considerable differences. We can say that the first strike of the crisis dealt a lot of damage to Brazil, but the country was able to recover. I think today, for many important reasons, Brazil is much more prepared to face a crisis, almost as prepared as Europe might be. The amount of reserves that the Central Bank has is 50% larger than it was back at that time. Back then, we only used 20% of the amount we had.

Also, the financial system is different from other countries; it is much more regulated. We have been through many hard situations in the past. We don’t allow the bank to leverage as much as abroad because we know sometimes when you have a stress, these leverages can hurt a lot. I think the Central Bank is much closer to the system and understands it better than in other countries…

Here, the banks are more domestic. Their performance, their risks are much more linked with Brazil than abroad, which is good in a situation like this. The bank is in good shape to face potential issues.

Another good point is that the bank has very good reserve requirements. The Central Bank has a lot of freedom to provide liquidity that is already from the system, to the system. Why the requirements are so important can be explained by historical reasons. It is huge, maybe three of four times the usual size for normal countries. Such caution is needed to face a situation like that.

In terms of companies, it’s about the same. Companies are not as free as they were before. Today, they really take their own responsibilities. Many measures were taken to appease the economy starting from December last year, mostly, to increase the number of regulations for the system, of monetary policies, and so on and so forth. In the end, the leverage for the last eight to ten months was reasonable, so we don’t see any major issues.

As for alcohol companies, they increased their leverage, but the level of leverage they have is not yet an important one and is very short term compared with the US – maybe 30 years. In our case, it is much more doable: like an iPad, like a TV, like a car. In such cases, the leverage process is much faster that it is in a situation like that. Also, banks usually have very good foresight of its performance considering what has happened in the past in Brazil.

Another important thing is the way the government sees this crisis. In 2008, our president, Lula, at the beginning of the crisis, said that this was just a small wave, that it wasn’t anything important. You see, the way the government approaches these prices is completely different. This is huge and it will affect the country; we must be prepared for that. It’s a much better approach.

The previous government used the monetary policy, which was okay at the time, because the economy was facing a very severe shock, so it was important to give some support to the economy. But the way the current government is doing things is much better. What it’s doing is to keep tight the fiscal policy and use the adjusted, variable monetary policy. At the end, they can bring a better balance to the economy and support the economy in a much better way. When you reduce interest rate, you provide support for the whole economy, and the central government, which is not the most productive sector, keeps tight. This is how you provide productivity for the economy and ensure that it is in equilibrium. The way the government is approaching this is the first time in our history.

Can you speak a bit more about your funds, on shore and off shore, and the strategy you use? What are your expectations for the future? How is it to invest in Brazil?

Brazil has a great amount of funds for the capital market, considering the size of the country. Why? Because most of the citizen’s savings are in the country, not abroad. Also, the capital market has improved quite a lot, because the whole legal framework has improved in the last ten years. This has changed the behaviour of companies completely, because now, they have capital to invest.

In our company, Maua Sekular, sometimes, in equities and macro-themes, and in credit, some of them are local and some are not, but our focus is the Brazilian instruments. We know the culture, we know the market. We have been here for twenty or thirty years, therefore we have experience with the Brazilian market. By understanding what goes on abroad, we can translate this into concrete actions here, in things we know better.

We are not that enthusiastic with the current situation in Europe and in the United States. We think that those countries are going very strongly, very fast in the wrong direction. We think that there are still hard times to come – maybe not as severe as 2008, but still, we have to be cautious. Our funds have been going very well this year; we are in the top 3 or top 5 in each one of them. We have been though tough times because of the crisis, but we are doing okay, raising money from investors. We haven’t lost any assets either, which is good for a situation like this.

In terms of prospects for Brazil, well, we have suffered a lot, but it will get much better in the future, once we are past the epicentre of the crisis. Everybody will start thinking about investments again and inject money into the country. Although the country is currently in a good position, I think that it will become much, much better in the future. It is responding in a good way to the crisis and it is strong enough to accommodate to this in a good way.

Equity in Brazil is very cheap. The stock exchange lost 17% this year, so far. Most of the companies are driven by the domestic market, one of the few in the world in which there is high demand that is here to stay for a very long time. Those companies can turn the situation in their favour. Our currency, which was very overwhelmed, isn’t so much anymore. We also see a very strong balance of payments because it is being financed by long term investments.

What are your challenges? Has the behaviour of your clients changed?

We have some investors from the United States and Europe, but the breakdown is mostly in Brazil. Something about Brazil makes the behaviour of investors different. As an investor, in order to take risks, the opportunity needs to be very good. The investor needs to feel comfortable. This is definitely a must for any kind of risky endeavour. Because of this, during the crisis, a lot of investors moved to non-risky types of investment.

After the crisis, when Brazil recovered, just part of that money came back. The company’s peak used to have 2.5 billions, but now it has a little over 1 billion. But the investors that we have learn with this process. They understand that there are ups and downs, but if the company is okay, the investment process is okay, etc. And eventually, it comes back to you. It is our case.

But despite that, I cannot really say that we have important losses, an important amount of clients leaving and so on and so forth. So I think that the crisis was good for a very immature industry, because it could help it become more mature. We are in a very early stage in our industry. But because of this change in the economic policy, in a permanent way, probably, the interest rate might not be 12% anymore but 8% instead. It may seem high, but it is much lower than before.

Are you going to focus on Brazilian investors now, or perhaps now that the situation is better, some people might like to put money into other markets?

Well, this is a long term process. We have investors in other countries as well – some in New York, for one -, but we like to focus our main efforts on the local investors. With an environment like this, the potential to invest abroad isn’t that high. Even though there are some efficient “big guys” abroad, with very high quality, they do not need us to invest in Brazil.