Opportunities on the Horizon: Investing Through a Slowing Economy

Regional Previews | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 68 Brazil ’s economy surprised to the upside in 2022, growing 2.9%. As the impact of higher interest rates take hold and the rest of the world slows down, we believe Brazil is also likely to decelerate to less than 1% real growth in 2023. Partially offsetting Brazil’s present slowdown is China. As Brazil’s largest trading partner, China is expected to grow close to 6% in 2023, providing broad support to economic activity in Brazil in the years ahead. Brazil’s new fiscal rules should ease concerns around fiscal excesses. It should also give the central bank (BACEN) more room to manage inflationary risks. Inflation is easing, and this can give the monetary authority room to ease. Right now, real rates are close to 9%while equity multiples are below 8 times. As we assess relative and absolute value in the region, we view Brazil’s equity and local bond markets potentially attractive on a risk-adjusted basis ( FIGURE 2 ) . We expect to consider further portfolio allocation to Brazil as we rotate into emerging market (EM) shares in the future. FIGURE 1 : Higher Interest Rates, Moderating Inflation 3.00 3.50 4.00 4.50 5.00 5.50 6.00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Mar-21 Jun-21 Aug-21 Oct-21 Dec-21 Mar-22 May-22 Jul-22 Oct-22 Dec-22 Feb-23 % p.a. % p.a. Benchmark policy rate % (Left) Brazil inflation % consensus forecast 2023 (Right) Source: Bloomberg as of May 30, 2023 FIGURE 2 : Brazil Valuations Down -100 -50 0 50 100 150 200% 0 5 10 15 20 25 30 '01 '04 '07 '10 '13 '16 '19 '22 Forward 12m Return Trailing 12m P/E Forward 12m Return MSCI Brazil PE Source: Haver Analytics as of April 28, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.