Despite years of political upheaval, Brazil is attracting greater interest among investors due to the purchasing power of its growing middle class. In investment terms, being middle class offers more opportunities.
Investors want vibrant companies with proven management and robust business models, to exploit their position with the consumer as wealth accumulates and the economy grows.
Former President Lula da Silva’s two terms in office up to 2011 has been tainted by controversy over his role in the Lava Jato corruption investigation, but Lula can be credited with transforming the lives of more than 40 million people through their progression into the middle classes.
From 2006 to the end of 2011, GDP per capita more than doubled, from $5,860 in 2006 to over $13,000.
Global sporting events secured during Lula’s tenure helped open the country up to foreign interest and investment. Brazil hosted the World Cup in 2014 and the Olympics in 2016.
Then Lula’s successor, Dilma Rousseff, was ousted after allegations of bribes and kickbacks generated through Petrobras, the national oil company. Last August, she was impeached, and Brazil’s economic outlook darkened again.
While the political challenges continue with President Michel Temer, who is seen as an interim candidate to cover the period before next year’s election, his initial programme of reform was welcome and coincided with declining inflation, enabling the central bank to lower interest rates.
Market growing wealthier
Despite the ongoing uncertainty, Brazil’s middle class is providing a solid base for recovery. This year, second quarter retail sales growth of 3% year-on-year was the first positive for the past ten quarters.
Brazil now presents an exciting opportunity: a big market which is also growing wealthier.
Our experience suggests there are always company specific opportunities to be found, and there are a number of excellent consumer-facing companies that have served us well.
Leading clothes retailer Lojas Renner is an example. The firm has increased revenue through the recession years, partly supported by new store openings, but also via the increased average customer spend in their core customer group, 18 to 39-year-old women.
Another sector with significant potential is private services, as growing wealth and aspiration boost demand for better education, housing and health facilities. Brazil’s firms are beginning to meet those demands.
While younger populations are often associated with higher consumer spending, Brazil’s longer-term driver for health demand is its ageing population.
Brazil’s leading pharmacy retailer Raia Drogasil estimates that the number of over-60s will rise from 16 million to 30 million over the next 15 years.
That senior category currently spends almost BR200 per family per month on healthcare products, compared to less than BR60 for 20 to 29-year-olds.
Raia’s business has proven to be robust following the merger of the two groups five years ago. Its long-term structural growth and successful multi-brand model underscore our positive opinion on the company.
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