Brazilian shares: cheap and getting cheaper

Brazil's stock market is posting some of the lowest valuations in over a decade, but one of Latin America's best-known investors is shifting funds out of the nation's equities amid growing concerns about raw material prices.

Will Landers, the head of equity strategy for the region at Banco BTG Pactual SA's asset-management unit, is betting on pricier stocks in Mexico as US companies move production closer to home from Asia.

In an interview, Landers said that the company has recently changed its stance on Brazil to neutral because of short-term concerns about commodity prices, especially iron-ore prices. The company prefers Chile and Mexico, its only overweight in the region.

It's not an obvious choice. Mexico outperformed its regional peers last year, and its stocks currently trade at an average of nearly 12 times their estimated forward earnings - almost twice the multiple for Brazil's benchmark Ibovespa index. Brazilian stocks extended their year-to-date decline on Tuesday, and their P/E ratio is now at the lowest since 2008.

Even with Mexico's stocks selling at higher prices, the country remains an attractive investment. The political environment is quieter, money from remittances is helping boost the local economy, and trade tensions between the US and China are prompting companies to expand their presence in Mexico, as Landers explains.

Landers, who worked for almost two decades at BlackRock Inc. and started at BTG in 2019, said that he likes Mexican companies that have a greater exposure to the country’s Northern region, which borders the US.

Landers have been favoring Chile for a long time, due to the fact that its economy is slowing down at "a more reasonable pace" and because it’s home to Sociedad Quimica y Minera de Chile, the world's largest lithium company, which benefits from the global electrification theme. There is also a political element as the country prepares for a referendum on a controversial new constitution.

"Landers said that the Constitution being drafted should be rejected, which would be positive for asset prices," Landers said.

The money manager is no longer bearish on Brazil since the beginning of the pandemic in March 2020, and has turned to an underweight position on miner Vale SA as a result of a "frustrating and bumpy" economic reopening in China. Iron-ore prices fell by 25% during the second quarter, amid growing stockpiles and fears that China will enforce steel output restrictions.

In Brazil, Landers has been investing in consumer staples and utilities. He has built a “substantial position” in Eletrobras - the power company that was recently privatized through a huge share offering. Consumer stocks focused on high-end consumers in Latin America's largest economy are also among his bets.

Landers predicts that the October presidential election in Brazil will not have a significant impact on the country's fiscal policy.

"We expect the winner of the presidential election to keep up a certain level of continuity in economic reforms that began in 2016," said Landers. "Once we know the winner's economic plans and team, there should be some relief on account of the expected continuity signal."