BlackRock Grows Wary of Brazil Stocks as Pandemic Takes Toll

BlackRock Inc. has turned more cautious on Brazilian stocks amid increased risks to the recovery of Latin America’s biggest economy.

The world’s largest money manager became underweight Brazil earlier this year and is getting more selective, according to Ed Kuczma, who manages $1.4 billion in Latin American equities for the firm. Covid-19 deaths in Brazil are outstripping every other country in the world, after the nation was hit by a more contagious variant and started late vaccination campaigns. The deteriorated scenario recently led some states to adopt stricter restrictions.

“We started 2021 with a lot of optimism about the global economic rebound, but I do see activity challenged in the region,” Kuczma said in a video interview. “Brazil has a couple of challenges, including a second virus variant with a very fast spread and some difficulty to get the vaccines into the right places. That’s weighing on prospects for the reopening.”

Brazil, which trails only the U.S. in Covid-19 tallies, surpassed 12 million infections on Monday and is set to top 300,000 deaths this week. An MSCI index tracking Brazilian stocks is down more than 10% this year, compared to a 6.8% drop for regional peers during the same period.

BlackRock Grows Wary of Brazil Stocks as Pandemic Takes Toll

Kuczma, who was overweight Brazil at the end of 2020, also flagged a fragile fiscal scenario after the country spent more than almost any other developing nation to cushion the economic fallout from the pandemic. Increased spending weighed on local assets, with the Brazilian real weakening to above 5.80 per U.S. dollar earlier this month. To fight rising inflation, Brazil’s central bank delivered a bigger-than-expected rate hike last Wednesday.

“Even as the more aggressive tone from the BCB showed it will defend the currency, inflation dynamics are a concern,” he said.

Among Brazilian stocks, he sees opportunities in health care and companies that are focused on environmental, social and corporate-governance initiatives, including some names in the pulp and paper sector.

A successful distribution of vaccines would alleviate “a lot of concern” in Brazil, he added. Amid growing pressure from allies and businessmen, President Jair Bolsonaro on Wednesday shifted his language about vaccination and discussed a coordinated response to the pandemic with officials including the heads of Congress.

BlackRock is overweight both Chile and Mexico. Kuczma likes Chilean banks and said retailers should benefit from a relatively faster economic reopening, with Chile having administered 45 vaccines for every 100 inhabitants, compared to just eight for Brazil. “While valuations have gone up in Chile, there’s a good chance of a positive earnings readjustment there,” he said.

In Mexico, where ties to the U.S. economic rebound and an austere fiscal policy have led to a growing number of bullish bets, he likes airports and the real estate sector. Money sent through remittances should also help consumer names, he said.

©2021 Bloomberg L.P.

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