Equity Research in Brazil: The Best Way to Apply Economics to Real Life?

What happens if everyone in your family is an economist?

You might want to follow in their footsteps… but maybe do something a bit different.

One good option is equity research, where you can combine your economic skills with finance and the capital markets.

Our reader today came to the same conclusion as he navigated his way into equity research in Brazil – from a family of economists:

Out of the Central Bank and into the Investment Bank: Getting In

Q: How did you first become interested in equity research?

A: I was born in “Economist Land:” My immediate family (plus cousins and others) all worked in economics or finance in some way.

One of them had worked for the IMF and the Brazilian Central Bank, and another family member had owned a small broker-dealer company in Brazil in the 1990s.

I saw how the high inflation and the currency fluctuations made the capital markets a high-risk, high-reward place, and I knew I wanted to get into the industry from a young age.

Q: So, you majored in finance or economics, and then…

A: No! I did an undergraduate major in engineering, completed a Master’s in Finance degree, and worked in various fields before entering equity research: Risk management and the back office, a family office, and FICC-related sales & trading.

After a few years in those roles, I applied for MBA programs, won admission to a top business school in the U.S., and joined the sell-side equity research team at a large domestic bank in Brazil.

I gained experience there and in a corporate finance rotational role, and now I’m looking to get into buy-side equity research.

Q: Good luck!

What was the sell-side equity research recruiting process like?

A: It’s far less structured than it is in the U.S.

Banks still hire students out of undergrad and incentivize them to stay for the long term, but the entire process happens more slowly, and firms don’t necessarily make you go through a specific set of steps.

People who network their way in tend to come from related roles, such as sales & trading, corporate finance, and investment banking. But it gets very difficult to network your way in after more than a few years of full-time work experience.

My story of winning an offer during an MBA program is quite rare.

Interviewers focus heavily on your soft skills and your ability to fit in with the team. As in other regions, you need a demonstrated interest in the markets, and you must be able to discuss recent trends.

The ER industry has become more competitive because there are so many Brazilians with MBAs from top schools, so the CFA is also becoming more important for setting yourself apart.

The technical questions and case studies in interviews are the same as those anywhere else: Expect 3-statement modeling tests, accounting/valuation questions, and stock pitches.

On the Job at a Large Brazilian Bank

Q: Can you tell us about the equity research industry in Brazil?

A: Since Brazil has the largest economy and capital markets in Latin America, it has a well-developed equity research industry as well.

A mix of international bulge bracket banks, “In-Between-a-Banks,” and domestic Brazilian banks cover companies here.

Middle market and boutique firms (whether regional or “elite boutique“) don’t do much yet (as of 2017 – 2018).

Pretty much all the international BB banks cover companies here: JPM, MS, Citi, CS, GS, BAML, and DB.

Of the “In-Between-a-Banks,” the European and Japanese ones have the strongest presence – firms like Santander, BNP Paribas, Mizuho, and Sumitomo all have solid coverage teams.

Three major domestic banks control most of the investment banking market: Itaú, Bradesco, and BTG Pactual.

They all have a strong presence in equity research as well, which you’ll see if you look at any of the Institutional Investor rankings.

That might change in the future because of the corruption scandal(s); the political climate could give smaller domestic banks and international firms an opening.

Q: Thanks for that summary.

What are the most common industries, and does any of the analysis differ from what you do in other regions?

A: Brazil has a diversified economy, at least compared with the smaller countries in Latin America, so research teams cover a mix of industries.

Some of the biggest industries by market cap are commodities (Oil & Gas and Metals & Mining), financials (Commercial Banks), and consumer staples (Food & Beverage), so many of the companies we cover are in those sectors.

Financial modeling is financial modeling, so you’ll still see quarterly and annual projections of the three statements, valuations using multiples and DCF analysis, and industry data to support initiating coverage reports.

The main differences include:

• Brazilian GAAP vs. IFRS – These have been converging over the years, but if you look at older reports and filings, there will be discrepancies. Some of the differences relate to subsidiary accounting, dividends, and exchange rates and borrowing costs.
• Lower Liquidity and Market Capitalization – Since there is far less liquidity, and since firms are much smaller than they are in the U.S., you have to dig into companies in a lot more detail to understand them.

It’s much harder to skim through a company’s financial statements and build a model just based on the documents; you have to get to know management and speak with sources on the ground.

• Currency Fluctuations – Since the BRL/USD exchange rate has been volatile and since the Real has fallen so much against the Dollar, sometimes research analysts will present financial projections in both BRL and USD side-by-side.

If you want to see a few sample reports for companies and industries, check out these examples:

• Brazil Retail & Consumer Goods Research – Santander
• Brazil Macro & Market Research – Generali Investments
• LatAm Universe Coverage Book – Santander

NOTE: We found all these reports with simple Google searches. Many firms make reports and updates publicly available if you search for the right keywords.

Q: Thanks for explaining that.

Previous equity research associate interviewees have said they spent more time speaking with investors and management teams than they did on financial modeling.

What was your experience?

A: I agree with those previous comments; you do a lot of modeling for the initiating coverage reports, but not quite as much after that.

In my role, I spent more time getting to know the management teams and putting them in touch with institutional investors.

I didn’t speak with the investors as much as the salespeople did, but we still interacted a fair amount because sales always wanted our views on various issues.

You split your time more evenly between company management and investors in buy-side equity research since you have to understand what everyone else in the market is doing.

Q: What are the compensation and long-term prospects of this role? Do most research analysts stay there for a long time?

A: Post-tax, post-living-expense equity research compensation in Brazil is about 20% lower than in New York.

Individual income taxes are about 15% lower in Brazil, companies pay for 100% of your healthcare, and the cost of living in São Paulo is ~30% lower than in NYC.

However, salaries and bonuses are also lower, so you can expect to earn about 20% less after taxes and living expenses.

Regarding exit opportunities, most sell-side research analysts either stay in the field or move into investor relations at companies they have covered.

A few may go into private equity or mutual funds, which is possible because recruiting is less structured than in NY and London.

But traditional ER exit opportunities are more limited because there are relatively few hedge funds here.

Q: Thanks for explaining that.

You mentioned in the beginning that you’re looking to move into buy-side research now. What’s your long-term plan?

A: Buy-side research was my plan all along.

I like buy-side research because it combines analytical/introspective work and communications with investors and management.

In most roles, you tend to do one or the other (investment banking skews heavily toward analytical work at the junior levels), so it’s rare to find that balance.

Also, the compensation and working hours are quite reasonable if you find a good team.

Finally, I like the importance of communication skills in research.

You publish reports and speak with different parties all the time, and, coming from a technical background, I’ve always wanted to do more of that.

Q: Great. Thanks for your time!

A: My pleasure.