Raphael Kassin: is Brazil the country of the future?

I fail to see the relevance of low level street crime on the performance of a countries economy or stockmarket. The title of this article suggests some insights into potential economic pitfalls for Brazil and instead majors on his poor holiday experience...

errm. Isnt Brazil still an emerging market. Which means its infrastructure isnt great and needs money spending on it, and where corruption is still a problem but is at least being recognised as a problem. Isnt that part of the opportunity - to invest in a country where improvements can be made. I dont think these factors have been overlooked by anybody; Brazil is one of the worlds worst performing equity markets this year? This is little more than someone's sob story from having a not so great holiday. And as for street crime, Mr Kassin should take a trip to South London some time. Who does he work for btw?

Trip Advisor by the looks of it...

Raphael Kassin is a native of Brazil, a renowned fund manager and a pioneer in emerging market debt, his article therefore draws on his experience in these three areas.

He had a great track record running one of the largest and most successful funds in the asset class in Europe.

FAO ennui: He is currently doing consultancy work.

Amy Williams

Deputy Editor, Citywire Global

Great article. Brazil is indeed a "troubled paradise". A beautiful country with serious problems, and yet with enormous potential. Over the last 10 years I have seen Brazil turn from a poor country to a US style consumer culture. Brazilians are very much like Americans - they spend too much and eat too much. Brazil has, like the US, become a nation of fat consumers in dept. Today Brazil has a credit fuled boom and a serious obesity problem. I am very optimistic about the long-term potential of Brazil but it will be like driving on a Brazilian road - a bumpy ride!

what about the new president? is a real sign of continuity? A Kassin's view should be interesting...

Raphael your points are well taken, as are your concerns. You know Brazil better than I ever will, thus I take your words at face value (without making an act of faith). However, I’ve known you for quite sometime now and I hardly remember you being upbeat on Brazil at anytime to actually bet substantially on the country’s debt the way you did with Argentina or Venezuela. Is an inverse home biases at play here? You wouldn’t be the first one to judge severely your compatriots. You could well be right this time around and Brazil may be heading into serious trouble. What's more, other imminent observers of the country are warning about the imbalances mounting there especially on the consumer front. Granted that what matter to all of us in the investment world is what the future holds not so much what happened in the past. Nevertheless, would you at least admit that you have been wrong about the Brazilian external debt market in the last 5 years? As per the JPM indices, the performance of the latter has dwarfed that of Argentina and Venezuela, your forte (in the last 5 years ending in November 2012, the Brazilian debt returned +9.6% p.a. against 1.6% & 3.3% for Argentinean and Venezuelan debt respectively). Would you Raphael? Rest assured though, I will not discount your forewarning for smart investors like yourself scarcely make twice the same mistake :)

Great comments. Thank you all for taking the time to shoot me. Let me remind you that I am not just a tourist. I also invest in Brazil, in local infrastructure and other projects that give exposure to some of the topics I mentioned. That, together with fixed income) is my point of reference. Importantly, I am not a stock market investor!

As a fixed income investor, I consider politics, the economy and the ability to walk safely on the streets. In all these 3 areas, Brazil is failing.

Politically, corruption scandals erupt everyday and the government has yet been able to distance itself from the culprits. The new president is a protege of Lula and one of his close friends, need I say more? It is not what you say you do, it is what you do. So, she can say whatever she wants about being clean and wanting to change the scene but...she is not distancing herself and her party from the culprits and the corruption merry go round continues. How does her personality affect the economy and the investment climate, you might ask? I give you just one example: the president of CVRD (not small peanuts in the Brazilian economic scheme of things) was replaced after 10 years of great service for a political ally of the government. I and others believe there is more underneath that change than meets the eye. Some may think that it is ok to take a few pennies into his pocket when the whole pot is big but...if you take a penny, you take a pound. The sum of all pennies may not make a big difference in good times but when the consumption bubble bursts, what will one say? And that consumption boom is in course to bursting. Recent GDP numbers were worse than expected. Where will the next one be?

The economic boom based on domestic demand is important but must be managed smartly to avoid boom-bust scenarios. That is what I want as an investor, financial stability. However, as in Turkey, the central bank allowed the currency to appreciate so much that the bubble finally burst (and more may be yet to come). A USD/BRL exchange rate near 1.50 was not workable. Domestic products were too expensive. it was cheaper to fly out of the country and finance trips with savings on purchases. Human resource costs were also out of touch with reality and will continue to be that way for some time. One smart reader compared my comments to trip advisor. Well, maybe he/she should consider the additional cost of investing in a country where the exchange rate is unrealistically too dear, legal bureaucracy delays projects sometimes by years and in the end, you need to bribe someone to close a deal. Maybe one can still profit when all is added in but that's my point: There are many variables that can just go wrong when investing in such a country and therefore, the risk premium should reflect them.

Positively, the exchange rate has weakened substantially in the last couple of months. Let's hope that is not purely a result of the crisis in Europe. The BRL needs to be trading near 2 against the USD for local investments to start making sense from a USD perspective. And it is nearly there at 1.86.

I won't dwelve on crime for too long but just consider the effect of having your CIO, project manager or fund selector being robbed or even kidnapped? While in London you might have crime problems, it does not usually happen on Kensington High Street as often as it does in similar areas in Brazil (in fact, in Brazil it happens everywhere!).

Mussie is right in that my strength has been in choosing bond investments in countries that offer extra-attractive potential returns. Brazil was definitely one where I found those returns in the last few years because I found the potential returns too low to consider. I found great returns instead elsewhere in Argentina and Venezuela. But please note that I try to buy low and sell high, this having returns substantially better than the index return for a full year. When we consider my returns since 1998, I can confidently say that my choice of being invested in Brazil only a few times and having chosen other countries instead has brought returns not only better than if I had invested in Brazil but substantially better than the index AND than most of the fund managers out there. So, yes, I would do it all over again.

Importantly, I am not predicting that the Brazilian economy will collapse. I am commenting on its volatility and the yield I can get from its bonds. After all, with foreign currency reserves at all time highs, it would be difficult to squander it all so fast. But one never knows what a prolonged European crisis can do in terms of contagion to emerging countries, or maybe a Chinese slowdown (Brazilian trade with China has grown exponentially in the last 3 years).

Let me just add one last comment: I am a bond investor, so my investment options are hard currency and/or local currency. When I consider investing in an emerging country' s hard currency bonds, I expect spread contraction. At the moment (and for some time now), Brazilian bonds do not offer attractive potential returns from spread contraction. After careful dissection, one will find that most of the return has come from pure interest rate movements. So, Brazil does not offer the attractive return that I would expect from an 'emerging country'. In terms of local currency, the USD/BRL has also done well but not in the last few months. I am sorry for fund selectors who bought local currency Brazilian funds expecting a goldmine earlier this year. Most of tht has been because the currency was expensive but also because the USD was due for a correction. There will likely be a good entry point in local currency when the USD/BRL is close to 2.

I hope this clarifies my perspective a bit better. Thank you for your comments and happy holidays.