The COVID-19 pandemic has caused extreme volatility in the financial markets this year, which represents additional challenges for Brazilian investors. Concerns about the impact of the novel coronavirus led the Brazilian government to bring down its projected growth this year from more than 2% to 4.7% contraction. Given these factors, where should investors in Brazil look to drive growth and outperformance during such a difficult time?
New opportunities from disruption
Many Brazilian investors have been forced to explore alternative options outside of their traditional fixed income portfolios, due to historically low interest rates. Despite attractive returns in the local equity index (IBOV) over the past 10 years, the Brazilian Reais exchange rate with the U.S. dollar went from 1.5 to 5.4. This leads many Brazilian equity investors to believe that they have missed opportunities abroad, and as a result, they are now looking for ways to diversify their portfolios.
Fortunately, the impact of technological advancements on the Brazilian economy is providing new opportunities for growth. For example, the COVID-19 pandemic has actually led to the push for greater accessibility and mobility with so many employees working from home. Even prior to the onslaught of the virus, smart phones in Brazil were becoming ubiquitous, more affordable and easier to use. Now, technology is continuing to facilitate a world on lockdown, with more connectivity tools to work from home, practice telemedicine and engage in e-commerce.
Given the critical nature of behind-the-scenes infrastructure to support these products and services, we are seeing companies, and even whole industries, being forced to either retool or fail. These are companies that work in sectors such as the cloud, cybersecurity, automation, semiconductors and robotics. Investors who look to equity strategies focused on technological disruption will be able to capture the benefits of long-term trends in these sectors.
Investing without borders
The market environment has changed drastically, such that investors in Brazil who take a more globally diversified approach are more likely to reap previously untapped benefits. By investing outside of the country, they can take advantage of some of the more dynamic and fast-growing global sectors in this new environment, including those involving automation and digital economy strategies.
This is a new approach for Brazilian investors, who have historically maintained a very strong home bias and have had little to no need to diversify their investments abroad. But now, they can also look to opportunities in the global fixed income markets, where we’ve been in a historically low-rate environment for years. In particular, the U.S. high yield market has provided attractive relative levels of yield over the past 20 years, due in part to the strength of the U.S. economy. U.S. high yield has outperformed most other fixed income options and provided returns that compare favorably with the equity markets but with lower volatility.
In addition, it’s important for Brazilian investors to start looking more closely at global opportunities in tech-focused sectors that are seeing accelerated growth and disruption. These technologies are primarily produced in developed countries, and their value is in U.S. dollars. Previously, investors have accessed these spaces via direct individual equity investments or structured notes. Now the market is ripe for selective investment managers to help make these opportunities more attractive and accessible to a larger investor base in Brazil.
As an example, AXA Investment Managers and XP Investments recently partnered to offer Brazilian-based investors access to global equity and fixed income strategies through three local products focused on the digital economy, automation, and the U.S. high yield market. This provides local investors international opportunities with companies whose businesses are not in lockdown but are actually growing. As they look for better ways to reach higher performance, investors in Brazil should look out for vehicles such as these that provide them with easier access to strategies that can diversify their portfolios abroad.
We hope to see Brazil thrive once the pandemic recedes and investors become more comfortable accessing more unique and dynamic portfolio options. As the investment process is made simpler and more accessible, we anticipate seeing this goal accomplished.
Column by Rafael Tovar, director, US Offshore Distribution, AXA Investment Managers and Fabiano Cintra, Funds Specialist at XP Investments
For Funds Society, Madrid