There’s no question Brazil is facing challenges (some of which I explored in my prior blog), and recent news headlines have led to bouts of market volatility. We can’t predict exactly how the political situation will pan out in Brazil, but we do know that as markets dislike uncertainty, things could be a bit bumpy in Brazil for a while. However, that doesn’t mean long-term investment opportunities aren’t there. We can’t ignore macroeconomic factors in a particular country, but we are bottom-up investors and look at individual companies and their individual prospects. Here, I share my observations of a few of the many companies my team and I visited recently in Brazil, the challenges they are facing, and the ways they are working to overcome them. It is our job to pick and choose the companies we believe can survive and prosper when the situation turns brighter in Brazil—which we think it will in time. Exports: Engine of Growth Amid some rather dire domestic data, we’ve seen exports as a beacon for many Brazilian companies. My team and I had the opportunity to visit a bus body manufacturer based in Brazil but with worldwide operations and manufacturing. We were not surprised to learn the environment was very difficult, as demand had collapsed with no immediate expectations for recovery. Profitability took a dent and the company’s leverage had spiked up. The lack of credit availability is a major concern for the sector, but more/better transportation is needed in the country, so the company felt longer-term demand for buses should increase. On the more positive side, the drop in Brazil’s currency, the real, has aided export growth, and executives at the firm were more optimistic about foreign markets driving business. We also sought to obtain some insight into the Brazilian auto industry by visiting an auto parts plant. To reach the plant, we traveled along a five-lane highway that was owned and operated by a different company we would also be visiting. During the ride, the driver passed through three toll booths, each collecting 10 reals, or about US$2. The creation of toll plazas is interesting, as it becomes a political issue. Drivers will try to turn off a toll road, avoiding payment when a plaza is located beyond a major population area. On one road, we learned only 8% of users pay tolls, while for another, about 40% pay. We stayed on the road and paid all our tolls, finding this highway to be in excellent shape and flanked by beautiful green countryside as well as some eucalyptus tree plantations. The highway had to be cut out through the mountainous area, terraced on both sides to prevent mudslides. When we arrived at the car parts factory, the finance director gave us a history of the company, which supplies pistons, piston rings, crank shafts, air and oil filters and a number of other parts both for original equipment manufacturers (OEMs) and the car repair industry. The processes included hot metal casting of molten steel or aluminum into rough parts and then machining them to fine tolerances. That part of the factory was hot and dirty, with the workers pouring the white hot metals into molds. Then after cooling, the molds were opened and moved to the machining area where workers augmented with robots drilled, cut and ground the parts down to shiny instruments with fine tolerance. We noticed that each part was tested multiple times for accuracy. It was a grimy and dirty process except in the air-conditioned room where the final inspection and packing was done. At the plant we found a mixture of hand labor and robots being used, giving the flexibility to produce small batches for different clients. Similar to what we heard from the bus body company, company officials said car production and sales in Brazil were quite bad, but they were benefiting from exports and aftermarket sales. We also had dinner with executives of a car rental company. They confirmed the impact of Brazil’s devalued currency and told us more local tourists were visiting other cities in Brazil rather than traveling abroad. However, one problem was that sales of their used cars will likely now be more difficult as local auto manufacturers are selling their autos at lower prices, and consolidation in the industry could occur. When we asked about the threat of competition from US companies, one executive said, “Brazil is a tough place to do business! We are not afraid of foreign competition.” Consumer Sector Struggling, but Surviving We also met with executives of a large food products company. Although it appeared to be a well-managed company, a large proportion of its costs were in US dollars. With the weak Brazilian real and consumer weakness reducing their ability to raise prices, the company was facing a difficult year. Wheat is a key ingredient for many of their products, but the currency weakness didn’t offer them much of an advantage, as much of the supply has to be imported. The company is trying to maintain margins by raising prices slowly and restructuring plants. Officials at the company told us they hope to increase their exports in view of their competitive prices in foreign currency terms, particularly to the United States. They also are considering acquisitions of other companies to gain market share in this depressed market, but have found that most of the targeted companies are family-owned groups that resist selling and have not been as badly impacted by Brazil’s economic downturn because they are not heavily leveraged. At a beverage company we visited, executives said that the current crisis in Brazil had given time for the company to consolidate some of its prior acquisitions and operations. They reported that beer sales have been more resilient than soft drinks (which is generally true all over the world during economic downturns) and foreign operations offered a buffer. When we asked executives how they saw the affordability of beer in Brazil, they told us they were focusing...
Investment Adventures in Emerging Markets - Notes from Mark Mobius
Mark Mobius, Ph.D., executive chairman of Templeton Emerging Markets Group, joined Templeton in 1987. Currently, he directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios. As he spans the globe in search of investment opportunities, his “Investment Adventures in Emerging Markets” blog gives readers a taste for what he does, when, where, why and how. Dr. Mobius has written several books, including “Trading with China,” “The Investor’s Guide to Emerging Markets,” “Mobius on Emerging Markets,” “Passport to Profits,” “Equities—An Introduction to the Core Concepts,” “Mutual Funds—An Introduction to the Core Concepts,” ”The Little Book of Emerging Markets,” and “Mark Mobius: An Illustrated Biography."
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