Brazil’s water crisis is risk for stock market; managers look for opportunities abroad

RIO DE JANEIRO, BRAZIL – One of the main risks for equity investments with exposure to the Brazilian market – and which is not fully incorporated into asset prices – is the water crisis.

According to Paulo di Sora, of RPS – XP Investimentos, “We are entering the rainy season with very low [reservoir] rates and we are going to have La Niña with a low rainfall forecast. We are now seeing the government trying to restrict energy consumption and this, in practice, has made us more pessimistic about Brazil’s GDP. There are great chances of having a GDP at zero or less than zero with the water crisis.”

“We are focused on economic growth outside Brazil,” says Di Sora, highlighting that even the positions of RPS funds in the steel sector were reallocated to companies abroad, because in 2001 there were scheduled power cuts to prevent a collapse of the electrical system.

President Jair Bolsonaro recently issued a decree that determines the reduction in the consumption of electrical power between 10% and 20% by federal public administration, autarchies and foundations between September and April 2022. The rule does not apply to state-owned companies.

For small consumers, Minister of Mines and Energy Bento Albuquerque said Wednesday afternoon that the government is “in the process” of finalizing the design of a program to create incentives for the voluntary reduction of electricity consumption. According to Albuquerque, the program should be launched on September 1. The government is trying to prevent rationing or more drastic measures to avert potential blackouts.

Less emphatic in his pessimism with the country, Occam Brasil’s partner and manager Carlos Eduardo Rocha explains that the reason for his funds to have over 50% of their risk exposure abroad is the better risk-return relation in the international market.

According to Rocha, even if the water crisis does not result in rationing and other detrimental impacts to the economy, the scenario abroad is more attractive.

Occam Brasil’s manager stresses that the fiscal risks in Brazil are “very high” and that the federal government has already shown that its “preferences are clear” by favoring initiatives such as the increase in the Bolsa Familia (Family Grant), indicating an inclination towards populist measures and breaking the spending cap.

Rocha also highlights the institutional conflicts, most recently between President Jair Bolsonaro and the Federal Supreme Court (STF), as a factor that increases the country risks and depreciates the Brazilian stock market assets.

“If you remove that [fiscal and institutional risk] the markets improve. You can have a trigger that effectively changes this rapidly and Occam is quite active to quickly adapt to the market and can have a rapid reversal,” he said.

More “agnostic”, Jorge Larangeira, founding partner of Giant Steps, a quantitative investment fund manager, explains that, although his way of choosing assets differs from his colleagues, his funds currently focus on the rise in interest rates and also in stock markets, but particularly foreign ones.

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