Brazilian fund managers buy stocks expected to thrive with lower rates

Brazil's interest rates are still rising. Fund managers say it's nonetheless the right time to buy stocks bound to jump once the Selic benchmark rate starts to fall.

On Feb. 2, Brazil's central bank raised the Selic benchmark rate to 10.75%, in its eighth consecutive hike since its historic low of 2.00% from a year ago. And while more hikes are expected this year, due to double-digit inflation rates, investors are already betting on a reversal in the monetary cycle.

Mauricio Bittencourt, founding partner of asset management company VELT Partners Investimentos Ltda., noted that as a long-term investor, he believes that this asymmetry, of dropping rates and rising stock prices, will play in favor of investors. Lower rates will benefit stocks of companies that have been battered during the pandemic.

"It is the most dynamic moment I have ever been to in my career in Brazil," Bittencourt, said in a panel at Banco BTG Pactual SA's CEO Conference event. "In Brazil, the business environment used to have a relative inertia. Businesses which were good usually would remain good, and the more challenging ones had difficulty in becoming leaders in their sectors."

Now this inertia has been altered by disruption, the emergence of crypto and the importance of ESG investing, among other relatively new phenomena in the investment markets.

"We are investing in shares that are influenced by the increased interest rate. So if long-term interest rates remain low or even go lower, we'll be investing in these shares as a very good way of exploring this trend," Bittencourt said.

The manager also emphasized focusing on portfolios that navigate well throughout economic cycles. "We will have a portfolio of companies generating company value, building operating profit along the cycle," he said. He also recommended diversification within different sectors, including BTG Pactual, healthcare provider Hapvida and power companies Eneva and Equatorial among his stock picks.

Brazil was one of the first countries which raised its interest rates to counter inflation pressures, Squadra Investments – Gestao de Recursos Ltda. CEO Guilherme Aché said. "So if you want to have returns above the average— the market average in the long run, at some point, you need to invest [in stocks] that may also generate a lot of headaches today."

As an example, Aché said he is looking at retailer Renner, a company that has fallen out of favor with investors. "You need to look at these companies that fell dramatically, that suffer from the current interest rates but are ahead in terms of cash flow. And there's this increased impact on consumer goods as a rule of thumb," the manager said.

Crypto talks

Florian Bartunek, founding partner of asset manager Constellation Investimentos e Participações Ltda., said he finds cryptocurrency "a phenomenal type of business." "Soccer player [memorabilia], artworks, court order debt or contract of debt payments, those can be sold via crypto assets," he added.

"Consumers want to buy things 24/7. They are not willing to wait for the stock markets to open in the morning to do that," Bartunek said.

Aché has a different point of view, saying that crypto assets will "deserve a chapter of their own" in books discussing economic bubbles, along with the tulip and dot-com bubbles.

"Internally, we are making a huge effort to try to understand that scenario," Aché said. "The main objective in the short run is to understand whether blockchain technology will affect the business where we invest or not, both positively and negatively."

A moment of disruption

With several trends conflating such as ESG, blockchain technology and digitalization, managers are "going through a moment" in selecting their portfolios, Bittencourt said.

These recent trends have allowed "room for disruption" in the market, the manager said. Businesses that are profitable but are not following ESG guidelines and are not investing in digitalization "will lose a lot of value in the short term."

On the other hand, businesses which may not be currently relevant or very profitable could generate value in the next few years," Bittencourt said.

"This is an environment of serious disruption where, for those who invest in shares in the long run, will be the moment where we need to relearn other concepts," he noted.