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LAVCA in the News

Value Investors Call Bottom to Brazilian Plunge

10 September 2015

(FT) Value investors with strong stomachs and deep pockets are calling a bottom to Brazil’s plummeting markets, despite an economic and political crisis which could see the President impeached and last week led to the country’s credit rating being downgraded to junk.

Multinationals such as British American Tobacco and Spanish construction conglomerate Abertis are among those taking advantage of depressed Brazilian asset prices to take locally-listed subsidiaries private. Brazil’s bourse has fallen 36 per cent in dollar terms this year.

“It’s a vote of confidence in the underlying business,” said Romas Viesulas, of Nau Securities in London, of the trend towards buying out minority shareholders and delisting local companies.

Brazilian assets have plummeted from their 2010 peak, when state-controlled energy group Petrobras raised $70bn in the world’s largest equity offering and the country was viewed an emerging market darling. Today, by contrast, Brazil is engulfed in its worst recession since the Great Depression, a corruption probe has reached into the highest levels of government, and most investors are giving the country a wide berth.

“Brazil moves in cycles: smart investors sell at the top, buy at the bottom,” said a São Paulo corporate lawyer. “This time is no different — so long as you can stomach the volatility.”

BAT is buying the 25 per cent of its local subsidiary Souza Cruz that it does not own; Albertis and Brookfield Asset Management are buying out the listed shares of local toll road operator Arteris; while Diagnósticos da América is delisting after the medical group’s share price fell almost 60 per cent from its 2010 peak.

Mr Viesulas said investors are searching for bargains among so-called “fallen angels” such as Natura, the leading beauty products company, which is trading at a third of its stock market peak with a 7 per cent dividend yield.

Other potential targets included companies trading at a discount to asset value, such as GP Investimentos, the private equity firm, and groups with strong balance sheets, such as footwear maker Grendene.

Private equity investors are also stepping up their commitments, said Cate Ambrose, president of the Latin American Private Equity & Venture Capital Association. In the first half of the year, they invested $2.3bn, 20 per cent more than in 2014.

“There’s never been a better time to invest,” said Ms Ambrose.

“You’re going to do really well on the exchange rate and business owners are more incentivised to work with private equity groups and valuations have clearly come down.”

The last time the Brazilian real, down by a third this year, approached current levels of close to 3.9 to the dollar was in 2002, a moment often seen later as a once in a lifetime buying opportunity. But back then China’s economy was growing fast and the commodity price boom was just beginning. Ms Ambrose cautioned it was difficult to pick the bottom of the Brazilian market for anyone with less than a 24-month horizon.

Alejo Czerwonko, emerging markets strategist at UBS Wealth Management, said he also saw opportunities in the dollar corporate bond market with average spreads on some issuers at 700 basis points, the same as in Argentina, whose economy is in far worse shape.

“We don’t recommend broad exposure, we think certain corporates with a relatively stronger balance sheet, relatively lower sensitivity to foreign exchange depreciation, [and] relatively lower dependence on commodities are offering interesting yields,” he said.