Q: Are there hidden opportunities in Brazil and Mexico?
Krishna Mohanraj, CFA
Both markets have underperformed, but for very different reasons. In Brazil, they have a budget problem, and they always had a budget problem. The Lula government has been working on a fiscal response and that continues to be weak. And that place on the currency relates to the central bank being forced to maintain high rates. So, it's a vicious circle for them that they never seem to get out of.
In fact, I read the stat, I read that $56 billion of foreign capital has left Brazil just this year (2024), which is the largest financial outflow in the country's history. That tells you a lot. So, it is a cheap market, and it has gotten much cheaper. In fact, we have this unwritten philosophy that we try to travel to the cheapest market from the previous year, which made me go to Brazil late last year. And I remember sitting in a panel of portfolio managers and there was so many of these ideas thrown around, stocks are so cheap that it's going to work in 2024. And we were talking about that on the team. One of those stocks is down 60% from that time. So, it's even cheaper now. So, we never stopped looking because as I've mentioned many times we are interested in companies, not countries, but you have to appreciate that the landscape is so difficult for some of these businesses — high interest rates, struggling consumer — you just have to be picky.
Mexico, very different story. The underlying economy is sound. The issues are all political, but the Trump win rhetoric around tariffs and immigration are back, obviously. And Sheinbaum, she's a true AMLO (Andrés Manuel López Obrador) disciple, I guess you could call her that. She continues to push the boundaries on governance a little bit. So, there are definitely risks around that.
I've followed Mexico for a long time. I always view Mexico as a country that's been handed a great set of cards, but somehow, they can’t seem to get it together. We have a couple of investments in Mexico, each one is an idiosyncratic bottom-up story — very good businesses just caught up in some of these issues that I referenced. So again, the market is cheap. We continue to look for good ideas and at the right valuations, happy to consider new ideas in both those markets.