01/26/2016 14h50

In spite of crisis, Brazil continues being a magnet for investors

Valor International

The scenario may be confusing and of constant deterioration of economic expectations, but Brazil continues being among the most sought-after destinations for productive investments, according to a handful of global surveys recently concluded on the matter. The global confidence index of consultancy AT Kearney shows that Brazil fell one position in 2015, but remains among the top markets in the world for direct investment. Among the top 25 destinations, mature or not, Brazil is number 6, behind heavyweights Germany, Canada, UK, China and the US, which is number 1.

In a survey with more than 500 global investors conducted by Ernst & Young and released late last year, the big star is India, whose market for foreign direct investment has recently undergone deep transformations. But Brazil didn’t perform poorly: it is mentioned as the most attractive market by 5% of the investors and appears among the top three destinations in the next three years for 27%, behind India (among top three for 60% of the investors), China (47%) and Southeast Asia (38%), and ahead of the US, which was cited among the top three destinations by 21%.

In another KPMG study whose focus is markets with high growth potential, it was the same. Among 300 executives and potential investors from the US, Europe and the developed Asia, China, India and Brazil are at the top of the list, followed by Mexico, Singapore and South Korea. Based on the survey, KPMG organized late last year meetings with global investors to talk about the three most sought-after countries. The result, for the overall surprise of the international unit of the consulting firm, was that Brazil attracted twice the number of investors that China and India did.

That, experts say, doesn’t mean global investors are ignoring the scenario of at least two straight years of decline in local economic activity, political instability and Operation Car Wash, the big probe on corruption at oil giant Petrobras. The surveys were all concluded in the second half of last year, when this picture had become even sharper.

“The message is that these investors continue having interest. But investors’ level of confidence and perceived risk changed, along with the growth potential of the invested companies,” says André Castellini, partner of Bain & Company. “But things haven’t changed to the point of making Brazil get off the map. Not for most of the investors.”

Experts say there are important differences between the current investment cycle and the one that occurred five or six years ago. Today there are no foreigners willing to open plants in the country. The focus is on buying what already exists and that before, in more favorable conditions, was not put up for sale. “Who looked at the asset in the past and considered it expensive is coming back to talk because with that same money it buys two equal assets,” explains Augusto Sales, a KPMG partner. “There is a strong markdown effect. It is the big national bargain-basement sale.”

If before all investors would look to Brazil, today interest is more concentrated on multinationals, sovereign and private-equity funds, which seek to gain local presence or scale given the better prices. Now, American and European firms conduct the negotiations. The Chinese, says Mr. Sales, with KPMG, invested heavily in the past, especially in the power, natural resources and financial sectors, but lost a little of the momentum because of their need to address their own internal problems.

In the near term, Mr. Castellini, with Bain & Company, says, transactions called “forced sales” stand out. They include both companies implicated by Operation Car Wash and those in situation of high indebtedness, which need to sell part of their assets. “This is the main trigger for large deals that happened last year and that will continue happening this year,” he says. “Even without Car Wash, the lack of credit is leading to the restructuring of the portfolio of many big groups, such as Havaianas,” he says, referring to the sale of footwear company Alpargatas, owner of the flip-flop brand, by construction group Camargo Corrêa.

Other companies that continue attracting investors are the innovative ones, which manage to transform their sectors and gain market share. “Companies like retailer Natural da Terra, which continue receiving investments,” he says.

Omar Caraballo, an AT Kearney director, says that the market size is no doubt the main factor foreigners look into when evaluating assets in Brazil. “And size, in any sector you look, be it consumer or health, the country still has,” he says, highlighting the service industry, especially in the health segment. Mr. Caraballo, head of mergers and acquisitions for the Americas at the consultancy, says that the currency devaluation may effectively make some assets more attractive for foreigners, but cannot be considered an isolated factor. In 2015 alone, the real fell almost 50% against the dollar.

Mr. Castellini agrees. “It’s not that the company gets cheaper because the company’s cash flow in dollars is also lower. But the perception of a strong devaluation is lower, which brings to the table some transactions that investors did not want to accept with the dollar at R$2”, he says.

“Brazil is not a country you abandon overnight,” says Caio Megale, economist of Itaú Unibanco. Among the appeals, he says, there is a lot of investment in infrastructure to be done and that must prove lucrative over time, in addition to the big consumer market.

“So multinational giants — and I’m really talking of giants, especially from the retail industry — say the country is the second-, third- or fourth-largest market in the world,” he says. Mr. Megale adds that lower prices, prospects anchored in the long run and a conviction that Brazil “will not turn into a Venezuela have been making the mergers and acquisition department of Itaú Unibanco busy.”

In spite of Brazil continuing atop rankings of global productive investments, the urgency seen a few years back no longer exists. Even though there is great interest, Mr. Megale says, there is no rush amid this period of instability and big idle capacity.

“Until when will the GDP fall, what will be the end of political discussions and how the next cycle will be are issues that bring a degree of uncertainty that are not likely to make the country more expensive,” Mr. Megale says. “So, it is worth waiting.” Mr. Castellini, with Bain & Company, has the same perception. “No one will lose their job for not having entered the country now, as it happened a few years ago. Even though there is interest, the rush and enthusiasm did abate. And this is valid both for financial investors and for companies.”