Brazilian companies are the cheapest they have been in years, presenting bargain hunters with prime buying opportunities.But foreign investors appear to be keener on the nation’s prospects than Brazilians, many of whom are spooked by the political turmoil that is worsening the nation’s economic slowdown.
Earlier this month, New York’s Coty Inc. agreed to pay $1 billion for the beauty-care unit of São Paulo-based Hypermarcas, expanding its presence in Latin America’s largest economy.
Through October, international investors such as Coty closed on 285 mergers and acquisitions in Brazil, up 5% from the first 10 months of 2014, according to data from PricewaterhouseCoopers. Brazilians, meanwhile, signed 275 deals this year, down 26% from the same period in 2014.
It is the first time since 2000 that foreigners have outpaced locals, according to Rogerio Gollo, partner and head of mergers and acquisitions in Brazil for Pricewaterhouse. “If you had asked me in January, I would not have told you this was coming,” he said.
What has turned the tide for many investors has been the weakening of the Brazilian currency by more than 30% to the dollar so far this year, which has helped foreign investors. In addition, the deepening of Brazil’s economic malaise—exacerbated by weakening political leadership—has hurt local companies.
Such cyclical booms and busts are common in emerging markets, and investors expect South America’s largest country by GDP to bounce back on the strength of its rising middle class and wealth of commodities. For those willing to endure some volatility, betting on Brazil now could pay off handsomely, said PwC’s Mr. Gollo.
“The buyer who is looking at Brazil with a horizon greater than three years is getting a good deal,” he said.
But the current picture is bleak. State involvement in key sectors and loose monetary policy unleashed during President Dilma Rousseff’s first term has left the government awash in debt and struggling to plug a massive budget hole. Reforms have taken a back seat as Brazil’s Congress focuses on the massive corruption scandal at state-run oil giant Petróleo Brasileiro SA, and impeachment efforts against the president.
“When you have a crisis of this magnitude, you need a vision…but the government does not have that,” said Ricardo Lacerda, founding partner and CEO of BR Partners, a boutique investment bank based in São Paulo.
As a result, business, consumer and investor confidence have collapsed. GDP growth is projected to contract by more than 3% this year. Urban unemployment recently hit a five-year high of 7.6%. Inflation is running at nearly 10%. Industrial production plunged nearly 11% in September from a year ago.
Among the hardest hit is Brazil’s auto industry. Vehicle sales through October totaled 2.15 million units, down 24% compared with the first 10 months of 2014. Thousands of auto workers have been laid off or furloughed. Some manufacturers who bet big on Brazil are putting on the brakes.
Chinese auto maker Chery Automobile Co., Ltd. is delaying a planned $300 million investment in its existing factory in the city of Jacareí, said Luis Curi, the company’s vice president in Brazil. Through October, Chery’s Brazil sales totaled 4,704 vehicles, down 38% from the first 10 months of 2014, according to the national auto-dealers association, Fenabrave.
Mr. Curi said the company has been hit by slumping demand and soaring prices for imported parts because of the weak real. “We’re living a perfect storm in Brazil,” he said.
In contrast, Honda Motor Co.’s Brazil sales have increased 15% to 125,061 vehicles so far this year, according to Fenabrave. But the Japanese auto maker, too, is retooling its investment plans amid concerns about the nation’s shaky economy and unpredictable politics.
The company said in late October it would delay the launch of a second Brazil vehicle-assembly plant that was slated to open in the first half of 2016. The new facility, which has been constructed in Itirapina in São Paulo state, will open “according to market developments,” Honda said in a statement. Paulo Takeuchi, director of institutional relations for Honda South America, said the auto maker remains confident about Brazil in the long-run, but is taking a cautious approach for now.
“What concerns us most is uncertainty, both political and economic,” Mr. Takeuchi said.