Brazil looks set to benefit from various long-term structural drivers – including strong demand for commodities – just as the economic cycle turns favourable. At the same time, Brazilian stocks offer attractive value. One of our favoured stocks includes the discount grocer Sendas Distribuidora.
Brazil is one of our favoured emerging markets given that it is benefiting from key structural trends that may not be understood – or priced – by the market. Brazilian commodities – a key export sector – are likely to benefit from various long-term secular trends. A growing global population will support demand for Brazil’s food exports, which include soybeans, meat, corn, coffee and sugar. Brazil, and Latin America more broadly, have the resources to feed the world. While a large chunk of these exports find their way to China, demand for food staples should remain relatively resilient even with a slower-growth China.
The global energy transition will also help drive Brazil’s mining industry, given it is a key supplier of minerals – including copper, graphite and nickel – essential to low-carbon technologies, which consume significantly greater quantities of minerals than traditional technologies. For example, electric vehicles require up to 4 times more copper than an internal combustion engine vehicle to electrify the power train.
In addition, the country is benefiting from growing oil production. Discoveries by state-owned Petrobras in 2006 resulted in oil output growing by more than 50% over the past decade. A further increase of around 40% is forecast for the next five years. That would result in Brazil becoming the fourth-largest oil producer globally. Booming exports of oil and other commodities helped the country register a record-high surplus of US$99 billion in 20231.
Favourable economic trends
Moreover, Brazil is at an attractive point in the economic cycle. Inflation has fallen sharply, allowing the central bank to lower interest rates, which reached a six-year high of 13.75% in August 2022.2 The Banco Central do Brasil cut rates by 50 basis points in December, for the fourth consecutive time, and indicated further cuts will follow in 2024.3 Falling interest rates will lower the cost of servicing debt and thus boost corporate cashflow, and should encourage consumers to borrow and spend more.
Stock opportunities
Despite these cyclical and structural tailwinds, Brazilian equities are attractively priced at just 8x forward earnings, or around a 30% discount to their average level over the past 15 years.
The discount grocer Sendas Distribuidora is one of the stocks we favour. Sendas Distribuidora is the second largest grocery retailer in Brazil via the Assai brand, a cash and carry format which stocks a limited range of goods typically 15 – 20% cheaper than traditional supermarkets and hypermarkets – so this format has been taking market share.
From a cyclical perspective, the company is benefitting from falling borrowing costs. It acquired a large number of retail stores when interest rates were high and the cost of servicing that debt pressured the business. Falling interest rates now means debt-servicing costs are falling just as the newly refurbished stores are delivering very strong sales growth. Moreover, the company should benefit as food inflation picks up – food prices surged in 2022 due to the impact of the weather phenomenon La Niña, only to fall in 2023 as crop output picked up.
From a structural perspective at just 20% of total food sales we expect the cash and carry format to continue to take share and the company has identified a significant number of new cities to expand into.
Given these positive tailwinds, we see strong earnings growth with the stock falling to 8.5x our 2025 earnings estimates.
You can learn more about the structural and cyclical drivers in Brazil and the opportunities provided by the country’s stocks by listening to this Good Value podcast: https://antipodes.com/blog/a-turning-point-for-brazilian-stocks/
1 https://www.reuters.com/markets/brazil-posts-record-trade-surplus-988-billion-2023-2024-01-05/#:~:text=Last%20year's%20record%20trade%20surplus,billion%20in%20a%20Reuters%20survey.
3 https://www.bloomberg.com/news/articles/2023-12-13/brazil-cuts-rate-by-half-point-as-inflation-eases
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