Why Some Investors Are Bargain Hunting in Brazil

November 6, 2015

  • Real should be stronger than 3 per dollar, Figueiredo says
  • Unlike in 2002, “today, we have zero stress, just in prices”

Luiz Fernando Figueiredo knows first hand what a Brazilian crisis looks like. Back in 2002, when a financial panic swept the country and pushed the government to the brink of default, Figueiredo had an up-close view of the chaos as a director at the central bank.

Today’s economic and fiscal woes, he said, have none of that full-blown crisis feel to him. Unlike in 2002, the government has plenty of money now — both in terms of near-record foreign reserves held by the central bank and cash stockpiled by the Treasury — to comfortably keep honoring its debts, said Figueiredo, who founded investment firm Maua Sekular Investimentos after leaving the central bank. Brazilian assets, including the currency and inflation-linked bonds, are cheap at today’s beaten-down prices, he said.

In 2002, “that was a time of stress,” Figueiredo, who manages just under 2 billion reais ($522 million) at Sao Paulo-based Maua, said in an interview last week. “Today, we have zero stress, just in prices.”

Brazilian markets have been tumbling for the better part of a year as a corruption scandal at the state-run oil giant triggered a political crisis in Brasilia that stunted government efforts to curb a swelling budget deficit and slow inflation. Benchmark inflation-linked bond yields have soared to over 7 percent from under 4 percent at the end of 2012. And the real is the world’s worst-performing major currency this year, having touched a record low of about 4.25 per dollar back in September. While the real has since recovered some, trading near 3.80 on Wednesday, Figueiredo said that he wouldn’t be surprised if investors pushed it to as weak as 5 per dollar at some point. A fairer price, he said, would be stronger than 3 per dollar.

“In terms of intrinsic value, assets in Brazil are very cheap,” Figueiredo said. “And you don’t need to go to the complicated ones.”

He joins a growing chorus of voices that say they’re looking for bargains in the recession-wracked economy. Franklin Templeton Investments Chairman Mark Mobius said last month he was searching for cheap stocks while three of Bill Gross’s top five holdings in the $1.4 billion Janus Global Unconstrained Bond Fund are now bets on Brazilian debt. And asset managers from more than half of the country’s top 10-ranked local funds said last month that they’re cautiously buying stocks again.

Figueiredo’s benchmark macroeconomic hedge fund, known as FIC FI Multimercado, has gotten hot recently. It gained 5 percent over the past month, beating 99 percent of peers and putting it above 58 percent of them so far this year, according to data compiled by Bloomberg. The fund’s performance over the past five years has been a lot weaker, beating just 22 percent of peers, the data show. One of Maua’s smaller funds, known as Arbitragem Master FI Multimercado, is beating 84 percent of peers over the past month and 81 percent in the past five years.

Figueiredo’s been involved in Brazilian markets for decades, having started his career as a young stock broker while still finishing up his college studies. He entered the central bank alongside renowned hedge-fund manager Arminio Fraga in 1999, just months after the country devalued the real. Another crisis would surface three years later, when the looming election of labor leader Luiz Inacio Lula da Silva sparked widespread concern that the country would renege on its debts. Yields on its benchmark dollar bonds soared to more than 20 percent before Lula pledged to take steps to curb the budget deficit.

Like then, Brazil will need to address its fiscal woes to contain the fallout, Figueiredo said. The budget deficit has ballooned to the equivalent of 9 percent of gross domestic product, the biggest in at least two decades, as the recession curbed tax revenue needed to fund recent spending increases. Congress, focused on calls to impeach President Dilma Rousseff, has repeatedly delayed votes on key fiscal austerity measures.

“The fiscal dynamic is very bad,” Figueiredo said.

Still, in a country sitting on $370 billion of foreign reserves, Figueiredo sees no reason for panic. Back in 2002, reserves totaled less than $40 billion. Brazil “will not go broke,” he said.


Why Some Investors Are Bargain Hunting in Brazil