With a population of over 215 million people, Brazil is the most populous country in Latin America, providing a large market for goods and services. Combined with abundant resources, a solid financial system and sound regulatory frameworks, Brazil presents significant investment opportunities, particularly in the infrastructure space.
Brazil is already playing a key role in global decarbonisation, with over 82% of its energy matrix based on renewable sources, primarily hydro, wind, biomass, and solar. Brazil's abundant natural resources allow it to generate electricity mainly from clean and cheap renewable energy sources.
Material investment in renewable energy offers significant opportunities for investors, not only in generation but also in electricity transmission assets. The opportunities in transmission are particularly strong, as most renewable energy capacity expansion is concentrated in the Northeast and North regions, while the majority of Brazil’s energy demand is in the Southeast.
Brazil is also a major player in the commodities sector and one of the world's largest producers and exporters of agricultural products, such as soybeans, corn, coffee, sugar, and beef. It possesses significant reserves of minerals, including iron ore, gold, and bauxite, making it a leading exporter of raw materials. Brazil's vast natural resources, abundant land area and favourable climate provide it with a key natural advantage in producing these commodities.
To support the increased production and exports of these commodities, there is a need for considerable investment in infrastructure such as roads, rail and ports, creating compelling investment opportunities for infrastructure investors like Utilico Emerging Markets Trust.
In recent years, Brazil has implemented pivotal reforms, including pension reform, central bank independence and a privatisation program aimed at reducing bureaucratic barriers and promoting infrastructure investments. However, fiscal challenges and rising inflation have strained the economy this year, prompting Brazil’s central bank to raise interest rates while other countries ease monetary policy.
Utilico Emerging Markets carefully navigates Brazil’s economic cycles, selectively positioning in companies with compelling bottom-up stories and clear competitive advantages. These specific moments create opportunities to capture solid long-term returns, with active investment playing a crucial role in achieving this outcome.
One sector where Utilico Emerging Markets decided to increase its exposure in Brazil this year is sanitation.
As the world progresses with innovations such as artificial intelligence reshaping industries and daily life, it remains paradoxical that many regions still struggle with fundamental needs, like access to clean water and sanitation. Globally, around 2.2 billion people lack access to safe water, and 4.2 billion people do not have safely managed sanitation services.
In the developing world, this gap is often due to complex regulatory environments that fail to create the right incentives for investment, political and governance issues, rapid urbanisation and economic constraints. However, some countries, including Brazil, are now creating frameworks that encourage private sector involvement, generating significant opportunities for investors.
As of 2022, around 16% of the Brazilian population did not have access to safe drinking water, and nearly 54% are without sewage services. These shortcomings are exacerbated by pronounced regional disparities, reflecting the urgent need for investment.
The Brazil National Sanitation Plan (Plansab) seeks to achieve universal access to water and sanitation by 2033, requiring an estimated BRL900bn (approximately $160bn) in investments. The 2020 New Sanitation Legal Framework marked a pivotal change, establishing clearer regulatory guidelines and targets for universal access, thus opening the door for increased private investment in the sector.
At the intersection of opportunity, capital requirements and supportive policymaking, Brazil’s sanitation future appears promising, with Brazilian company Sabesp standing out as a prime example. Sabesp is one of the largest water and sewage service providers globally, ranking as the second largest sanitation company by revenue and third largest by population served, reaching 28 million people. The company alone accounts for over 30% of all sanitation investments in Brazil.
In July 2024, Sabesp was privatised, reducing the São Paulo state’s ownership from 50.3% to 18.0%, thereby losing control of the company. This move was viewed as a necessary step to attract private investment, accelerate the state’s universalisation targets, and enhance service efficiency.
Sabesp’s investment thesis blends defensive sector characteristics with a strong growth trajectory. The company’s ability to leverage its leadership position in Brazil's underdeveloped sanitation sector offers substantial growth opportunities, alongside being potentially one of the most significant turnaround stories in Brazil.
We view recent developments in the company and sector as just the beginning, with Sabesp offering substantial long-term value creation and the potential to become a long-term compounder.
Charles Jillings is the fund manager of Utilico Emerging Markets. The views expressed above should not be taken as investment advice.