Global Equity Spotlight: Travel Edition Episode 8

Introduction and Economic Overview of Brazil

Hello everyone and welcome to Global Equity Spotlight Travel Edition a series where we delve into interesting topics affecting global equity markets. Today I have Cornelius and Wesley with me who have recently returned from a trip to Brazil. So let’s kick off with some highle facts about the economy.

So Brazil is a really interesting country. Firstly very surprised with the scale of it. I mean it’s a country which is the largest in Latam over 200 million people. We saw that pretty much as we were flying into Sa Paulo which is funny enough actually the largest city in the southern hemisphere which is quite amazing and the Americas and the Americas which is quite amazing.

Um in terms of a GDP per capita point of view it’s around the midpack of all Latam countries. So I think we did notice coming from South Africa especially the inequality gap there as well. And what prompted the trip to Brazil interest rates in Brazil is extremely high. They one of the rare economies that haven’t started lowering interest rates.

So they are s sitting with 15% official rate while inflation has trended down towards 4% which is close to their 3% target. They have a 1 and a.5% tolerance band around that 3%. So they are in that band at the moment. And if you look at their real rates north of 10% it really stands out versus other emerging markets.

And if you look at the valuation of the market it was very depressed at say seven times. It has started to recover at the moment. It’s now close to 11 but still a nice valuation gap versus emerging markets. And the market is really underowned by local investors foreign investors have started buying the market but we we think there’s very good opportunity.

On-the-Ground Observations and Lifestyle

For me there was two themes that stood out. It was one definitely financial inclusion. We saw that everywhere we went whether it be the micro merchants or even the larger stores. That’s includes the POS devices we saw or even like the Pix QR codes. So they’ll be at the micro merchants you could just take your phone out and pay which is quite remarkable.

Um another one was just generally the infrastructure buildout. I think from a country in emerging market that’s something that always surprises you and amazes you. The one thing though is that there is need for maintenance. We got a lot of um talk back and push back about some of these buildings that didn’t really look too healthy but apparently were under renovation for a couple of years. Don’t know how well that’s going to work out but yeah that was two of the things that really stood out to me.

And yourself Cornelius the green spaces were very nice. Wesley and I went for a jog almost every morning. And the one morning we went to the one of the biggest parks and we almost did a whole half marathon within the park and joined other running clubs. So that was nice within the concrete jungle. That was very good.

And then the prices of groceries really surprised me. Um I would say it’s definitely 30% more expensive than in South Africa. They also have very high import tariffs but I thought um fresh goods which they probably produce in Brazil would be cheaper but everything was more expensive. The only thing that was uh cheaper than in South Africa was the Avana um sandals. I hope you bought quite a few of those.

Corporate Highlights: NuBank and RaiaDrogasil

So during your trip you spent time visiting different companies offices along with attending the JP Morgan conference where you guys saw around 30 companies. Were there any highlights or interesting companies that stood out from from that conference.

So we saw a lot of different companies within the the conference itself and we met with a lot of different management teams. For me though personally one that really did stand out was that of New Bank. It’s a company that really has pushed financial inclusion over the over the time and they’ve grown around 40% KGA in terms of total clients from 2019 which is pretty remarkable.

Coming back and just switching it up a bit for a South African context it’s very similar to that of Capitec what they’ve done very much pushing towards a lower income um to middle class now and really trying to push the barriers of financial inclusion digital bank lower cost to serve. So that was one standout for me.

Yeah both of us actually met with them separately and the stores are sort of aligning for them with interest rates that’ll come down that’ll help their consumer but there’s also um tax exemption on their uh the LSM group that they typically serve and their business that they are building out in Mexico is actually tracking ahead on all the KPIs as versus where uh they tracked in Brazil when they started out. So that looks like a good one and we’re still happy with our investment there.

And then another one that might be interesting for SA investors um is Ryrogus. It’s like a pharmacy chain similar to Clicks or Dischem although I much prefer our selection that we have here. And it was really um crazy how many pharmacies there are. But despite that they are still rolling out um stores which I suppose makes me more bullish on the opportunity that our local pharmacies have in South Africa.

If you look at Rya’s market share it has grown um a lot over the last few years from 9% closer to 16% and they basically the same size as competitor number two to five and they’re really consolidating the space and they will also benefit from GLP1 generics coming out this year. But the valuation has run aart and um it is a bit of a a favorite under local investors. I attended their capital market stand. There were more than 300 people in attendance. Um anecdotally I was the only English speaking person that needed audio translation. Um but yeah it’s a stock the the locals really like. Um and it has shown very impressive growth over the last um 10 years or so.

Political Outlook and Future Considerations

What are the key things to consider for this year moving forward?

I think from my side it’s definitely the political uncertainty. We’ve seen a rightward shift of all Latam countries over the past year year and a half in terms of where the elections have gone. For Brazil though they’ve got the elections starting October this year and it’s a country where I didn’t expect the political uncert uncertainty to be that high. I mean when we were at the conference Shanto local investors it came up all the time even with business executives themselves.

Currently the race is between that of Lula the current incumbent and then also Bolsinaro. When I say Bolsinaro though which is really interesting is that his son is now running for presidency. That wasn’t to be honest the most market friendly option out there when will we chant a lot of the business leaders it was going to be that of the governor of Sa Paulo would have been their first pick um but we’ll see how it plays out it’s very dynamic very fluid uh they saw some time for the elections to play out itself so we’ll see and track the polls closer to that time as well.

Yeah it was actually our last day in Brazil together um while we were in a meeting when the announcement came in that Bolsinaro is still in jail um would like his son to run and the market uh dropped by 5%. Um but our stance is that if Lulo is left-leaning wins it’s just a continuation of the status quo and just like South Africa um you are being rewarded with very high real returns already. Um but then you have asymmetric return if the election shifts to the right. Um but unfortunately the companies are not doing anything about their cheap valuations at the moment. We we we did encourage them to do more buybacks at these levels but they still very nervous about the election. So I think that is a very key catalyst this year.