Managing Short-term Macro Influences to Stay Long-term Focused

November 2014

The Brazilian election season, which had seen near mass hysteria since summer, concluded on October 26. The following day, Brazil’s Bovespa Index finished trading less than 2% from its closing level on April 1. Given the market volatility driven by events throughout the campaign—including one contender dying in a plane crash and two opposition candidates each leading the polls prior to the election—the lack of performance deviation over this period is remarkable. As Exhibit 1 illustrates, much of the lackluster performance can be attributed to the flat-to-negative earnings revisions. Without meaningful fundamental changes to company earnings forecasts, traders were left to jostle the market relentlessly on the back of daily macro events.

Exhibit 1: Brazil 2014 Earnings per Share (EPS) Revisions


Brazel EPS Revisions

Source: Bloomberg

 

Ultimately, however, the poor fundamental environment translated into muted stock price performance. The overall direction of EMBI (emerging market bond index) spreads proved much more prescient in projecting Brazil’s performance, as shown in Exhibit 2.

Exhibit 2: Emerging Market Bond Index Spreads (shaded) vs. BOVESPA Index
(inverted, yellow)


Emerging Market Bond Index Spreads vs BOVESPA Index

Source: Bloomberg

 

The haphazard summer in Brazil illustrates a reality of emerging market investing—namely that macro and exogenous events can and often do significantly affect asset prices in the near term. Nonetheless, corporate fundamentals will dictate the extent to which equity prices sustainably change over the long term. At Driehaus, we focus on building portfolios through bottom-up stock analysis, yet we strategically incorporate macro analysis into our portfolio management. Our integrated approach continues to enable us to navigate situations such as the Brazil election period with discipline and a focus on longer-term opportunities.