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Brazilian equity chief: don’t despair over sovereign downgrade

Brazilian equity chief: don’t despair over sovereign downgrade

Brazil has already absorbed the impact of a sovereign downgrade and investors should avoid fixating on the country’s economic growth, BTG Pactual’s head of Brazilian equity has said.

Speaking to Citywire Global, Gustavo Hungria said now is a greater time than ever for investors to focus on secular stories rather than being drawn in by volatile macro headlines.

Hungria, who co-runs the BTG Pactual SICAV Brazil Equity Plus fund with Citywire AAA-rated Josef Zitelmann, said the emphasis has to be placed on companies with their fortunes in their own hands.

‘These companies have independent growth dynamics and don’t rely on the macroeconomic outlook to do well. That could be because the sector is fragmented and the company is consolidating. The penetration of a certain industry could be very low so it continues to gain share with the rest of the market.’

‘You don’t necessarily need a strong GDP, if you have a good company that is well positioned well, run being and able to generate value through things that are under their control, those companies will continue to exist and have opportunities,’ he said.

Hungria said firms need to have a strategic plan and understand long term consumer behaviour rather than relying on top-down policy or short term trends.

‘These are very well established businesses that have been there forever, usually these are premium market leaders. If they fail it will be for their own reasons, I don’t think the government has anything to do with it.’ 

Hungria and Zitelmann keep the fund small at 21 stocks and have low turnover, with some names in the fund since it launched in 2007. Six holdings make up 50% of the fund and Hungria thinks even under the current economic conditions he could find more names if he needed to.

The consumer sector is the biggest allocation in the fund at 41.6%. He names BRF S.A., the wold’s tenth largest food company and Brazil’s second largest company by revenue as a good holding. Lojas Renna, the second largest Brazilian department stores clothing company, is another, he said.

Downgrade

Hungria added that the recent downgrade of Brazil's sovereign debt by the S&P to junk status was anticipated and has already been priced into the market.

‘It is not something that changes the way things are going. Things are tough, challenging, the downgrade comes to make that more transparent. But I think it is something that the market is already working with. It is a matter of how much is priced in.'

‘A lot of companies are trading at the lowest valuation levels for five or 10 years, that is a lot to do with the downgrade of the country, not the downgrade itself exactly, but the macroeconomic situation.'

'I think what investors should do is see how the situations develops. When things will get back to normal, there will be a big discrepancy between reality and asset prices, there might even be opportunity.’

The BTG Pactual SICAV-Brazil Equity Plus fund returned 39% in Brazilian real terms over the three years to the end of August 2015. This compares to a fall of 4.3% by the MSCI Brazil TR, its Citywire-assigned benchmark, over the same period. 

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