Our trip to Brazil spotlights the improving and underappreciated investment landscape.
For many of our EM clients, Brazil is the largest relative overweight country position, with the two biggest constituents typically being holdings in Petrobras, the energy major, and Mercadolibre, the Latin American e-commerce and fintech platform. Beyond these, Brazil has been the subject of many recent team discussions as we debate the merits of a range of ideas, from NuBank in fintech to Natura in cosmetics, through to Eletrobras, the largest power company in the country.
Michelle Brown, our senior ESG analyst, recently returned from a week and a half of visiting around 20 companies and conducting site visits, ranging from fuelling facilities to ethanol plants. She has been sharing her reflections with the team.
Listen to this article
This audio is generated using AI
Capital at risk.
The economic backdrop is relatively buoyant today and has been improving in recent months, as one of our key macro research providers has pointed out, with credit activity, durable spending and import demand all having picked up sharply. Improving economic activity has helped stabilize the budget position, though there is clearly still a large fiscal gap that the government needs to gradually resolve.
Michelle noted that there are many reasons to be optimistic about opportunities for Brazilian businesses. There is a lot that could go right for Brazil, but the country is still full of extremes, for example, in income and energy inequality. Despite the volatility of politics, the country has good institutions. It's also clear that the country has some excellent research universities and a very well-educated tier within society. A relatively free press helps with accountability. Corruption has improved (dropping 15 per cent between 2013 and 2023 on the Corruption Perception Index) but remains a challenge. Poverty has decreased (the number in extreme poverty dropped 40 per cent in 2023).
Her trip had a bias towards companies in and around the energy sector and served as a very useful complement to recent research in the team on the likes of Petrobras, Raizen and Eletrobras. Energy in Brazil cuts to the core of many environmental, social, and governance topics that we believe will impact the long-term profitability of a range of companies and also have a macro-level influence on Brazil. The country has one of the lowest carbon grids and wants the money from selling oil/gas to support broader development. This has been a key consideration in the Petrobras investment case: the royalties paid by the company to the government have a much wider social importance.
Energy and sustainability in Brazil
Brazil is also keen to develop industries that can benefit from its abundant renewable energy. Michelle noted that it is making sure it's known to be 'open for business': for example, Chinese companies are investing heavily in electricity generation in Brazil, transmission, and of course, electric and hybrid car manufacturing. There is interest from data centres too, but relatively high electricity prices for customers may push investment elsewhere.
Electricity prices have gone from extreme highs to extreme lows, to highs again as a severe drought affects the country. Most of Brazil has access to electricity, but electricity bills do not yet reflect low generation costs. This is important for us to monitor, well beyond just energy and electricity, because it directly impacts disposable income, which will influence consumer choices across a range of portfolio companies. This has implications for holdings such as Natura, a relatively recent purchase in the cosmetics industry, Mercadolibre and the banks.
On the former, both Michelle and Alex Summers (one of the investment managers in the team) have had company meetings with Natura in recent weeks. We are mindful that it is early days for this holding but are carefully monitoring the brand strength and the company's commitment to building it.
Elsewhere, we have been debating Eletrobras, the state power company. While on the face of it, this doesn't feel like a typical Baillie Gifford investment, the case here would rely on the company making material improvements from a somewhat messy and complicated base. There is a potential turnaround story as Eletrobras is going through a transformation following its privatization in 2022. The company has restructured its governance model to streamline decision-making processes across its subsidiaries. Several in the team are yet to be convinced of the investment merits here, but Michelle has been very impressed by their head of sustainability, Camila Araujo.
There is still a lot to digest from the trip, but perhaps one of the key takeaways was the fact that there were about a dozen companies in which Michelle highlighted that further work would be worthwhile, as leadership in sustainability and governance could be a key growth driver over the next years. We have often said that commodities matter more than politics to the long-term outlook for Brazil, and beyond oil, we should also note that the country is endowed with great resources – including copper, cobalt, nickel, rare earths, lithium, graphite and renewable energy. Wider macro concerns about government meddling and high tax burdens are causing some negativity among local investors, but the scope for improvement is significant, which may well lead to stronger investment returns from here.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in September 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Potential for profit and loss
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this communication are for illustrative purposes only.
Important information
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Financial intermediaries
This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.
Europe
Baillie Gifford Investment Management (Europe) Ltd (BGE) is authorised by the Central Bank of Ireland as an AIFM under the AIFM Regulations and as a UCITS management company under the UCITS Regulation. BGE also has regulatory permissions to perform Individual Portfolio Management activities. BGE provides investment management and advisory services to European (excluding UK) segregated clients. BGE has been appointed as UCITS management company to the following UCITS umbrella company; Baillie Gifford Worldwide Funds plc. BGE is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.
Hong Kong
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Suites 2713–2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.
South Korea
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Japan
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
Australia
Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a “wholesale client” within the meaning of section 761G of the Corporations Act 2001 (Cth) (“Corporations Act”). Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client. In no circumstances may this material be made available to a “retail client” within the meaning of section 761G of the Corporations Act.
This material contains general information only. It does not take into account any person’s objectives, financial situation or needs.
South Africa
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
North America
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission (‘OSC’). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Israel
Baillie Gifford Overseas Limited is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755–1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
Singapore
Baillie Gifford Asia (Singapore) Private Limited is wholly owned by Baillie Gifford Overseas Limited and is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence to conduct fund management activities for institutional investors and accredited investors in Singapore. Baillie Gifford Overseas Limited, as a foreign related corporation of Baillie Gifford Asia(Singapore) Private Limited, has entered into a cross-border business arrangement with Baillie Gifford Asia (Singapore) Private Limited, and shall be relying upon the exemption under regulation 4 of the Securities and Futures (Exemption for Cross-Border Arrangements) (Foreign Related Corporations) Regulations 2021 which enables both Baillie Gifford Overseas Limited and Baillie Gifford Asia (Singapore) Private Limited to market the full range of segregated mandate services to institutional investors and accredited investors in Singapore.
116540 10049950
