Brazil – Poised for Breakthrough?

“In Brazil, a poor man goes to jail when he steals. When a rich man steals, he becomes a minister.” – Luiz Inacio Lula da Silva

  • Brazilian Equities (EWZ) have underperformed Emerging Markets over the last 10 years

  • Thoughtful Pension & Economic Reform is urgently needed

  • Financial Markets are signaling optimism

  • Current multi-factor analysis ranks Brazil #2 out of 35 countries

The MSCI Brazil Index outperformed the MSCI Emerging Markets Index by 957% from the start of 2002 to mid-2008.  However, the last 10 years (ending May 31, 2019) have witnessed Brazilian equities (EWZ) underperformance of -47.8% versus the MSCI Emerging Markets (EEM).  Over the last decade, Brazil has transitioned from rising power to fallen star. 

What happened?

Brazil enjoyed prosperous years under President Luiz Inacio Lula da Silva, whose tenure coincided with a global commodities boom.  Now Lula is in jail, his successor has been impeached and her replacement has been charged in an on-going corruption investigation.  Street crime is epidemic, and the country has endured its deepest ever recession, -3.54% Real GDP growth in 2015 followed by -3.30% Real GDP growth in 2016. 

What now?

Fed up, Brazilians in 2018 elected a former Army captain, Jair Bolsonaro, to reverse the decline.  Ending the 13 year rule of the leftist Workers’ Party, he promised to remake Brazil with an aggressive approach to crime and pro-market economic policies. 

Bolsonaro’s University of Chicago-trained economy minister, Paulo Guedes, set out to privatize some of Brazil’s long-protected stable of 400 state-owned companies.  Within 5 months, a newly minted infrastructure ministry had auctioned off 23 of them, including airports, port terminals, and a railway, raising 8 billion reais ($2 billion USD). 

What next? 

The Bloomberg consensus Real GDP growth forecast for 2020 is +2.20%, but an annual fiscal deficit of ~7% of gdp still weighs heavily on the economy.  Outsized government spending and inefficiency results in higher interest rates for private borrowers. Importantly, pensions account for one third of total public spending, and are a primary reason why the government spends so little on Brazil’s depleted infrastructure.

It turns out Brazil is one of the most generous countries in the world when it comes to pensions. Men retiring with full benefits get 70 percent of pre-retirement earnings, while women get 53 percent. By comparison, workers in developed economies get full pensions averaging 53 percent of pre-retirement earnings.

On June 13th, a draft bill was presented to overhaul of Brazil's social security system.  The government’s reform bill imposes a minimum retirement age, raises contributions, closes loopholes, and is expected to generate savings of 913.4 billion reais ($237 billion) over the next decade. 

Those savings will increase a further 217 billion reais with transfers from a workers protection fund to state development bank BNDES, bringing the total fiscal impact to 1.13 trillion reais, according to lawmakers.

As this daft bill was presented on June 13th, the Brazilian financial markets responded optimistically: the benchmark Bovespa stock index rose 0.9% to a three-month high above 99,000 points, the real firmed 0.6% to 3.8400 per dollar, and 2020 interest rate futures contracts fell below 6.0% for the first time.

The reform bill will now be debated, voted on and sent to the lower house plenary for a vote. If passed in the form presented on June 13th, it will be seen as a success for the Bolsonaro administration.

However, the timing of ratification remains unclear.  The pension reform seems certain to suffer both delays and dilution.  Approval will require leadership from the top, and Bolsonaro faces an uphill task to get congress to approve an “unappetizing” pension reform despite the benefits to Brazil’s fiscal health. 

“We have two alternatives,” President Bolsonaro’s spokesman said. “Approve pension reform or sink into a bottomless pit.”

Earlier in the year, Vice President Hamilton Mourao said he expects the proposal to be approved by August.

Morgan Stanley economists expect a House vote in August, while Goldman Sachs does not see pension reform turning into law before October.

What to do?

Investors in Brazil and across the world appear hopeful that President Jair Bolsonaro will push through key changes to the social security system in Latin America’s largest economy.  The stakes are high because pension reform could boost the country’s flagging economy and give it some stability in the long run. Failure to enact the changes could stymie growth. Chart 1 below reveals Brazil’s positive momentum and technical improvement (testing support and breaking downtrends over the last few months)

Chart 1: EWZ ETF (MSCI Brazil 25/50 Index) Price Chart – The Last 5 Years

EWZ Chart.png

The odds of successful pension reform remain uncertain, but current multi-factor analysis suggests Brazil is an attractive global equity allocation.  As of May 31st, Brazil (EWZ) ranks #2 out of 35 countries in Accuvest’s Global Core Equity – Country First Rankings. 

Brazil is highlighted by strong growth fundamentals, positive momentum, decreasing risk, and better than average valuations.  Default Risk in Brazil has dropped over the last 12 months (Chart 2 below), allowing investors to refocus on the country’s high profitability, strong expected earnings growth, and a very competitive currency.  A break through on pension reform and public finances would support Brazil’s constructive investment thesis.

Chart 2: Brazil 5 Year Credit Default Swap (CDS) Spread – The Last 5 Years (Lower = Less Default Risk)

Brazil CDS.png

In conclusion:

  • After a decade of underperformance, Brazil appears poised for a rebound

  • Brazil is an attractive global portfolio allocation based upon balanced multi-factor analysis

  • Key social security & pension reforms are progressing towards ratification

  • Financial markets and price momentum suggest optimism

Sources: MSCI, Thomson Reuters, CNBC, Bloomberg, Economist

France – Seeking Consensus to Drive Change

“A Problem Shared is A Problem Halved” – De Pierre Corneille

  • France has struggled with wide scale “Yellow Vest” protests since November 2018

  • April 2019 witnessed new Tax Cuts and the conclusion of France’s “Great National Debate”

  • Recent economic data suggests French consumers are well positioned to increase spending

  • France’s momentum “ranking” has improved from 29th in March to 17th in May (out of 35 countries)

April 2019 marked the end of France’s “Great National Debate”, which began in January, and resulted in the French president listening to grievances and answering queries in public debates for a total of 92 hours. All in, the consensus seeking exercise included 1.9 million contributions to the online forum, 10,134 town hall meetings, 16,337 “books of grievances” submitted by mayors, 27,374 emails, and 21 citizen assemblies. 

President Macron launched the great national debate in response to the “Yellow Vests” movement that began last November as a protest against higher taxes on motor fuel (France already has the highest overall tax take as a share of GDP in the European Union), but grew into a widespread and sometimes violent rebellion against Macron’s “haughty style and top-down method of governing”. 

The results of the great national debate (digested by tech firms using AI) revealed a few areas of national consensus – curbing climate change is urgent, taxes are too high, local governments are too weak, and bureaucracy is widespread, as well as, a few areas of contention – migration policies, and how to balance lower taxes with lower public spending.

Accordingly, on April 25th, President Emmanuel Macron cut taxes to assuage yellow vest protesters. Macron boosted pensions, reduced income taxes, and pledged to cut taxes further if the French would work more.

Throughout this process, the protesters taking part in weekend marches dropped from 280,000 in November to 22,000 in April.  Furthermore, during the first quarter of this year, the French economy expanded, and relative to the final quarter of 2018, domestic demand made a robust contribution to overall growth.

Bloomberg analysts expect growth in domestic demand to remain robust in coming quarters, supported by improvements in household finances:

  • Disposable income rose 1.2% in 4Q. Income growth is expected to be robust in 1Q as well.

  • Consumers have saved most of this extra income, raising the saving rate to 15.3% in 4Q from 14.3% in 3Q.

  • This quarter’s consumption numbers suggest consumers are ready to spend more of this income, which will help support growth.

The MSCI France Index provides broad exposure to 80 French companies, including some of the world’s most recognizable companies and brands. Top holdings include Total, LVMH Moet Hennessy, Sanofi, Airbus, L’Oréal, BNP Paribas, Vinci, and Kering.  The index (tracked by EWQ ETF) is allocated 22% to Industrials, 18% to Consumer Discretionary, 11% to Financials, and 11% Consumer Staples. 

Since late 2017, MSCI France profitability (10.5% ROE) has trended higher, and Sales Growth (3.7%) has more than tripled, suggesting reasonable “brand quality” and “pricing power”. While France remains beholden to the macro risks facing the European Union (Brexit, ECB Policy, and US Trade Negotiations), there are green shoots of optimism appearing in France: leading economic indicators are accelerating, short-term price momentum is strong, sovereign credit risk is dropping, and price-to-earnings valuations are 2.6 EPS turns lower than 5 years ago.

These characteristics combine to push France to #3 in the Accuvest Country Rankings, up from 34th in February.  We anticipate France (EWQ) will be a productive country allocation within global equity portfolios.  Forward expectations for Europe in aggregate remain weak, but any recovery is likely to be led by France, supported by lower risk, good fundamentals, improving momentum, and reasonable valuations. 

Sources: Economist, Bloomberg, MSCI, Accuvest

Is India's Growth Reasonable Priced?

  • India’s expected EPS growth is high, 26.6%

  • India’s trailing P/E ratio is high, 23.9x

  • Foreign institutional investment in India surged in Q1 2019

  • 26.6% expected EPS growth at a price of 23.9x trailing EPS appears “reasonable”


India's expected long term EPS growth has increased from 15.5% in November 2017 to 26.6% in March 2019.  Simultaneously, the rest of the world (an average of 34 other countries) has seen expected EPS growth decrease from 13.6% to 10.7%.  See Chart Below:

India Chart 1.png

Source: MSCI and Accuvest


India is currently the most expensive country in our universe, trading at a "lofty" 23.9x price-to-trailing earnings ratio.  This valuation metric was 23.2x back in November 2017, and has averaged 22.9x over the 2 years ending March 31, 2019.  The rest of the world (average of 34 other countries) currently trades at a price to trailing earnings ratio of 15.6x, and has averaged 17.3x over the last 2 years.  See Chart Below:

India Chart 2.png

Source: MSCI and Accuvest

Is India’s Growth Reasonable Priced?

Balancing (dividing) India's expected earnings growth by its price-to-earnings multiple yields a growth-to-value ratio of 1.1x (6th out of 35 countries).  The rest of the world (average of other 34 countries) exhibits a growth-to-value ratio of only 0.69, and the United States trades a growth-to-value ratio of 0.70x.  See Chart Below: 

India Chart 3.png

Source: MSCI and Accuvest

Recent price momentum suggests India's expected growth is both realistic and attractive to global investors.  The MSCI India Index returned 9.2% in March, outperforming 45 other countries.  Over that same period, Indian equities saw Foreign Institutional Investor (FII) inflows of US$4.3bn, the largest monthly buying seen in the past two years. 

 Year-to-date through March 31st, Foreign Institutional Investors have net bought US$6.6bn in Indian equities, the largest among all of the EM Asian markets.  Foreign institutional ownership (as % total India market cap) has increased to 19.3% (0.5% higher than start of the year), but still remains below 2015 peak of about 21%.  The 2019 fund flows are being channeled into Banks, Energy and Utilities, while limiting Staples and Metals/Mining (Goldman Sachs Research).

 ETF Implementation

INDA, EPI, and INDY are the 3 most popular India ETFs (by AUM).  Relative to INDA (iShares MSCI India ETF), EPI offers higher allocations to Energy and Materials and lower allocations to Consumer Staples and Technology.  Meanwhile, INDY (relative to INDA) provides meaningfully higher exposure to Financials paired with less exposure to Technology, Healthcare and Energy.


Forecasted earnings growth can shift higher for a variety of reasons, but confidence around India’s growth appears to be building heading into April 11th general elections.  In fact, foreign fund flows into India have accelerated heading into and coming out of the last 4 general elections (Goldman Sachs Research).  Given a stable political environment, an accelerated pace of reforms, and a huge surge in working age population, India appears well positioned to deliver high economic and corporate profit growth.  Only the future can tell, but foreign investment and price momentum suggest that 23.9x earnings is a “reasonable” price for India’s 26.6% EPS growth.  This goes to show, when growth is in short supply (globally), growth at a reasonable price can be increasingly expensive. 

Sources: Accuvest, MSCI, and Goldman Sachs Research



This article was written by James Calhoun, a Portfolio Manager at Accuvest Global Advisors. This article is strictly informational and should be used for research use only. It should not be construed as advertising material. The opinions expressed are not intended to provide investing or other advice or guidance with respect to the matters addressed in this brochure. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions to comply with matters addressed in this brochure. Charts and information are sourced from Accuvest, unless otherwise noted. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. You should seek advice from your financial adviser before making investment decisions. Investment risks are borne solely by the investor and not by AGA. AGA is an independent investment advisor registered with the SEC. All disclosures, marketing brochures, and supplemental firm sheets are available upon request.

Mexico Update: Equities, Peso & Politics - June 2018

In December I wrote an article entitled How Mexico Elections Could Affect Portfolios.  The general theme at that time was to maintain a very cautious approach to holding or buying Mexican assets due to the probability that a populist candidate with potentially unfriendly market policies would be elected president.  That July 1 election date is fast approaching and an update is warranted.

There are three main candidates in the race; Jose Antonio Meade (PRI), Ricardo Anaya (PAN), and Andres Manuel Lopez Obrador (MORENA).   Lopez Obrador, or AMLO as he is known, has narrowly lost the last two elections with cries of fraud causing violence and protest.  As polls show currently, he is a strong favorite with polling numbers in the high 40s and a 20 point lead on Anaya.  The most positive outcome, currently, is that somehow Meade or Anaya win.  However, with the lead so large and using history as a guide, even that scenario seems likely to end up with negative outcomes due to the serious protests and disruptions that are likely to ensue.

The more probable scenario is that AMLO wins and the markets have to deal with the fallout.  Of course, it is not known what that fallout would be precisely, but this candidate runs a highly populist campaign with a platform that could include renationalizing the energy sector, turning his back on NAFTA and other US-linked agreements, while pursuing fiscal and social policies that would definitely upset the business class and status quo.  His proponents are trying to paint him in a more friendly light, but there is considerable doubt that he will be anything other than hostile towards business and markets.  Where he fits relative to Chavez or the perception of Lula during his 2002 campaign is not yet known, but he is on the spectrum; so there is risk to financial markets. 

Someone on the Accuvest team is in Mexico several times a month consulting and advising on the financial markets.  Many of the political conversations we have include commentary that borders on hyperbolic.  Often times that kind of embellishment makes us think that the risk is fully priced in to the market.  However, there is still too much uncertainty about what kind of policy outcomes we might see.  Also, unfortunately, it is a little difficult to see much upside in any kind of scenario; expectations of a bounce or reversal seem unrewarding. 

The best long-term scenario is that someone other than AMLO wins the election.  Many of our conversations with political strategists focus on the undecided voters, which still represent a fairly large number, so perhaps a legitimate win for Anaya is still possible.  As we have heard many times, these voters and others who may have expressed an opinion in a poll, will all line up for whichever candidate is in 2nd place going into July 1; an ‘anyone buy AMLO’ voting bloc.  Simplistic math can support that thesis, but it would take everything falling into place.  And we are late in the campaign; debates have come and gone with no real changes in the polls.  Gaffes that may have doomed AMLO in previous elections do not seem likely at this point.  So, again, best case scenario – he somehow loses which would undoubtedly bring chaos.

Accuvest is in the portfolio management business, so having an implementable view on every market in the ACWI is required.  Our far-from-rosy outlook needs a bottom line recommendation for this article be meaningful.  As mentioned in December, we were not going to be long Mexican assets any time prior to the elections. 

Accuvest Country Rankings – June 2018


Source: Accuvest Global Advisors

For a brief time the peso did strengthen to levels that seemed extreme and for certain portfolios we actually initiated a short position on the currency.  The weakening of the peso in the past month has been fairly dramatic in time and magnitude.  We are likely to cover half the position prior to the election as negative sentiment is certainly not a secret and is in the price that has rewarded us nicely.  A lot of the NAFTA rhetoric has also been negative and is baked in to the current price.

Mexican Peso (Price of 1USD in MXN)


Source: Bloomberg

Another point made in the December piece was that in the past Mexico has had fairly significant declines in asset values in times of crisis.  In all cases, those were buying opportunities.  Our attitude is to assume that such a crisis could unfold after the elections; hopefully not, and maybe it’s a low probability.  We will look to take advantage of this opportunity.  If nothing so severe comes to pass, the opportunity cost is low given Mexico’s small weight in the ACWI.   Accordingly, this is a time to be attentive and patient. 

Year-End Review: 3 Ways to Improve Client Interaction

Year-End Review: 3 Ways to Improve Client Interaction

Our travels often take us to Utah, the home of best-selling author, Steven Covey. As with much of America, his book changed the way many think and work. It is no surprise that the Wall Street Journal has called this book “the most influential business book of the century.” Despite being written many years ago, the principles and thoughts still remain insightful and thought-provoking.

How Mexican Politics & Upcoming Elections Could Affect Your Portfolio

How Mexican Politics & Upcoming Elections Could Affect Your Portfolio

It’s time: you need to tune your scanner for information coming out of Mexico. What has always smoldered has started to flame. Those flames could be a five-alarm fire in 2018. Hyperbole? Maybe, but in the course of over fifty visits to Mexico this year alone and 33 years in the country focused on the economic and financial environment in the country, it is clear to our firm that the country is at a critical juncture, and the presidential elections next year will be the determining factor of which way Mexico turns.