Commentary
Brazilian Blackjack: Decoding the allure of a high-risk, high-reward market
January 21, 2025
This month, NS Partners fund manager Luis Alves de Lima writes on navigating a volatile backdrop in Brazilian equities, and the huge potential this market offers if political risks ease.
Imagine a game of blackjack. Not your typical duel in the bowels of a dark casino, but a game of chance steeped in the vibrant hues of Brazil’s economic landscape. This is a game where the potential rewards are tantalizingly high, but the risks, like the Amazon rainforest, are dense and unpredictable. Like a card counter, we watch carefully as each card is dealt – investigating companies and assessing the macro backdrop – to formulate a running count of the deck and calculate our odds of hitting 21.
The ace in this deck represents the transformative power of political change. A conservative victory in the 2026 federal elections could usher in an era of fiscal responsibility, market-friendly policies and renewed investor confidence. Drawing this ace could yield a multi-bagger return as Brazil sheds its “risk premium” and the investment narrative flips from basket case to market darling. That doesn’t mean you won’t be wiped out before the ace arrives.
As we count, the deck is stacked with low number cards (2-6) – embodiments of lurking macro uncertainties – with the ability to wipe out your hand. Brazil’s fiscal deficit, stubbornly high cost of capital and the ever-present spectre of political volatility loom large. Playing aggressively to a deck loaded with low number cards favours the dealer’s odds, much like the potential downside risks that could erode investment value when macro is deteriorating, but valuations are yet to catch down.
The high cards (10, Jack, Queen and King), represent the underlying strengths of the Brazilian economy (all high cards are worth 10 points, with the ace either 11 or 1 depending on what’s best for the player’s hand). These cards increase your chances of winning if low number cards are dealt out of the deck and the proportion of high cards increases. The low cards in Brazil are coming out as the clock ticks on socialist president Lula’s term, with elections in 2026. While an increasing proportion of high cards does not offer an immediate payout in our game, it does suggest an investment environment where the player/investor can soon lift their bets in line with improved conditions and chances of upside surprise increasing.
Investing in Brazil today is a calculated gamble with ever-shifting odds. While the macro and political backdrop seems daunting, low cards are exiting the deck as pessimism runs to an extreme and fails to reflect the true potential of the market. While future outcomes remain uncertain, we see a disconnect between strong company fundamentals and depressed valuations. The “true count,” the extent to which a deck favours the dealer or player (investor), will swing in the latter’s favour as political risks ease. The probability of making it to that elusive ace rises.
My recent virtual roadshow with 20 Brazilian companies painted a picture of resilience and growth. Companies like Grupo GPS, Rede D’Or and Lojas Quero-Quero are demonstrating robust financials, exceeding growth expectations and trading at inexplicably low valuations. I have also planned a trip to Brazil next month to continue the mission of finding when the ace might appear in this high-stakes game. It’s an opportunity to delve deeper into the dynamics of the Brazilian market, gather firsthand information and assess the true probabilities beyond the abstract numbers.
Investing in Brazil today requires a contrarian mindset; an ability to understand the macro risks and direction of travel and weigh this against what we are seeing on the ground as we engage with companies. It’s a game for those who understand risk and can calibrate their bets as the odds shift for or against them. As any seasoned player knows, ignoring the headlines and acting with conviction when the true count tilts in your favour is when the most lucrative bets can be made.