Schroders Hits the Brakes on Brazil State-Run Firms Before Vote

(Bloomberg) -- Schroders Plc has trimmed its exposure to Brazilian state-controlled companies following a sharp rebound in shares, taking profits ahead of the October presidential election.

Most Read from Bloomberg

• US Inflation Tops Forecasts, Cementing Odds of Big Fed Hike

• The World’s Hottest Housing Markets Are Facing a Painful Reset

• Stock Rout Deepens as Inflation Woes Hit Sentiment: Markets Wrap

• Ukrainian Successes Raise Russian Collapse to Realm of Possibility

• Jeff Bezos’s Blue Origin Rocket Suffers Failure Seconds Into Uncrewed Launch

State-owned enterprises were “pricing in an overly very negative electoral scenario” earlier in the year, trading “excessively cheap,” Pablo Riveroll, head of Latin American equities at Schroders in London, said in an interview. Following recent gains and with the vote lowering investor visibility, “we’ve reduced our exposure,” Riveroll said.

Banco do Brasil SA has been among the top gainers, rising 16% in August, its biggest monthly gain since the election of President Jair Bolsonaro in 2018. The bank’s price-to-book ratio -- which shows how investors value a firm’s assets -- had plunged near levels seen during the 2016 political crisis that culminated in the impeachment of Dilma Rousseff.

On top of attractive valuations, state-run plays gained momentum recently as incumbent President Bolsonaro narrowed his gap with front-runner Luiz Inácio Lula da Silva in opinion polls ahead of the October vote. While investors expect some degree of fiscal responsibility under both candidates, Lula has publicly opposed to selling assets and shrinking government influence in the economy, which may cloud the outlook for firms in which the government owns a majority stake.

The Bolsonaro administration, on the other hand, privatized the country’s power company Eletrobras in a jumbo share sale and pledged to give up the control of oil producer Petroleo Brasileiro SA.

Preferred shares in Petrobras are up 14% since the beginning of the year, outperforming the Ibovespa index by more than 5 percentage points.

Even after cutting back on its Brazil holdings, Riveroll says he’s still overweight on the nation within his portfolio, favoring stocks that will gain from stable or declining inflation and interest rates. Utilities, shopping malls, toll-road firms and telecom operators are among his preferred bets.

“We are also selectively exposed to domestic cyclicals that are heavily discounted including homebuilders and apparel,” Riveroll said.

And he wasn’t the only one tapping the brakes on state-owned firms. Local hedge fund manager Genoa Capital Gestora de Recursos also trimmed exposure to the space and scrapped options aimed at profiting out of stock gains.

Most Read from Bloomberg Businessweek

• Google’s Loon Project Gets Resurrected. Without Google. Or Balloons

• The Ethereum Merge Ups the Stakes—and Reshapes the Crypto Universe

• Startups Are Borrowing More as the Easy Venture Capital Money Vanishes

• The Alzheimer’s Drug Approval Mess Has Left Millions of People in Limbo

• Dry Cleaners Were Disappearing Even Before the Pandemic

©2022 Bloomberg L.P.