Equity analysts like to be contrarian. Such calls make it easier to be heard in a crowded industry and play to a narrative of independent thinking.
Recently, however, there have been so many calls for investors to increase their exposure to Brazil – often with the trade-off of lowering allocations to Mexico – that such a strategy is in danger of becoming consensus.
It is also questionable. That Mexico is set to benefit from nearshoring growth is undisputed – but just because the strength and duration of this tailwind is unclear, some ignore this positive driver for the Mexican economy.
Conversely, some analysts now see Brazil as all upside. With the political uncertainty surrounding the presidential election largely removed – despite recent unrest – many banks have been advising their clients that the Bovespa will hit bottom. But will it?
This year could be a good one to play it simple – and play it safe
The protests in Brasilia in early January were more televised vandalism than a serious threat to president Luiz Inácio Lula de Silva’s administration, but they underline the volatility and the polarization that plague the Brazilian economy.
Aside from the protests, the first week of the year provided enough ammunition for investors to rethink bullish calls on Brazil. Speeches by Lula and his new economy minister Fernando Haddad promised greater involvement in the economy by the large state banks.
The ‘pragmatic’ Lula – the foundation for a positive view of Brazil – has been conspicuously absent in the new government’s early prognostications. And the refusal of the supporters of former president Jair Bolsonaro to leave the political stage and allow Lula to govern increases the likelihood that Lula’s third administration will seek quicker solutions for the country’s many social and economic problems – and therefore larger fiscal deficits.
Macro tailwinds
Pro-Brazil macro calls often rest on the consensus view of the Chinese and US economies. With Mexico closely linked to the US, and Brazil more a derivative play on China, is it contrarian to think the macro tailwinds will be under Brazilian wings in 2023? It might be.
China may be opening up its economy – and finally removing Covid restrictions – but this is an admission of weakness rather than strength. The about-face suggests fragility in the opaque economy – why else would president Xi Jinping risk jettisoning the policy upon which he staked so much political capital?
At the same time, labour data from the US shows a combination of continued strong hiring and falling wage inflation, which are the ingredients for a ‘soft-landing’. Much more of this and the recession that is widely expected later this year will likely be postponed – or cancelled altogether.
This year could, therefore, be a good one to play it simple – and play it safe. In Latin America, the momentum of economic growth seems to still lie firmly to the north.