HSBC Brazil Fund Bets on Lower Interest Rates, Not Commodities
By David Clarke
July 12 (Bloomberg) -- HBSC Holdings Plc's Brazil Equity Fund, the world's largest portfolio focusing on South America's biggest economy, has quadrupled over five years by counting on demand for the country's natural resources. Not anymore.
Manager Luiz Ribeiro is shifting the $1.8 billion fund away from mining companies such as Cia. Vale do Rio Doce to take advantage of domestic spending as Brazil grows at twice the pace of the U.S. In the past year he's pulled 10 percent of his assets away from natural resource stocks and put them into house builders including Rossi Residencial SA, as well as store manager Lojas Americanas SA.
``We are moving out of the traditional commodity story and more into the locally driven economy,'' Ribeiro, 39, said in a telephone interview from his office in Sao Paulo. ``We are betting on consumption. The country has lots of cash.''
The Luxembourg-registered fund is exceeding the performance of a stock market that ranks among the 10 best performers globally over the past three years. Over the past 12 months the fund has advanced 83 percent, compared with a 67 percent gain for the Morgan Stanley Capital International Brazil Index, according to data compiled by Bloomberg.
Over the same period it ranked first among six other funds sold internationally that focus on Brazil, according to data from Chicago-based Morningstar Inc.
Iron Ore
Brazil has been one of the prime beneficiaries of growth in India and China, where spending on infrastructure has meant burgeoning demand for metals such as iron. Brazil's stock market last month became the first in Latin America to top $1 trillion in value.
Rio de Janeiro-based Vale do Rio Doce, also known as Vale, the world largest iron-ore producer, said in May that first- quarter profit almost doubled to a record as Asian demand pushed up prices.
Now Ribeiro says that lower interest rates and the money brought in by selling commodities mean that consumers will increase their spending on housing, food and goods.
Brazil's central bank last month lowered the benchmark lending rate by half a percentage point, the biggest reduction this year. The rate has dropped from 19.75 percent in September 2005 to a record low of 12 percent.
Ribeiro says Brazil will see faster growth in consumer spending than in the U.K., where the Bank of England last week raised interest rates for the fifth time starting in August, to 5.75 percent, over investor concern about rising prices.
Country Fund
``It's one of the few countries in the world where interest rates aren't rising,'' Ribeiro said.
Choosing to put money into a single-country fund isn't the best option for most fund buyers, according to Mark Dampier, who advises on fund purchases at Hargreaves Lansdown in Bristol, England. Europeans who want to invest in emerging markets should spread their risk by investing in a general emerging market fund rather than putting money into Brazil alone, he said.
The prolonged rise of stocks may mean that a decline is due, he said. Companies that make up the MSCI Emerging Markets Index now trade at almost 16 times estimated earnings, compared with just eight times in October 2005.
``With country funds you can get sucked in at the wrong time and that can be particularly painful,'' he said. ``It would definitely not be suitable for widows and orphans.''
For the moment, Brazilians are spending enough to keep their economy rising. Annual retail sales through March rose 11.5 percent, the most since July 2004, according to the National Statistics Agency, and 7.5 percent in April. State and non-state bank loans in the 12 months through April climbed 22 percent. Economists in the country raised their 2007 forecast for gross domestic product last month to 4.34 percent, according to a survey by the central bank.
Consumer Spending
The growth has meant a surge in investment opportunities for money managers, Ribeiro said. So far this year there have been 32 initial share sales in the country, compared with just 27 in 2006, he said.
``Ten years ago all you could buy here were mining and telecom stocks,'' he said.
In the past year Ribeiro has been buying shares of retailers such as Rio de Janeiro-based Lojas Americanas and Lojas Renner SA, the country's second-biggest retailer, to benefit from increased consumer spending.
Shares of Porto Alegre-based Lojas Renner, which said in May that first-quarter net income rose 24 percent, have soared 46 percent over the past year. Lojas Americanas's net income rose fivefold and its shares more than doubled in the past 12 months.
Mortgages
Lower interest rates are also prompting a rise in mortgage lending and spending on new homes. Brazil's mortgage market could expand fivefold or more in the next seven years, according to directors from Banco Itau Holding Financeira SA and Banco Bradesco SA. Shares of homebuilder Rossi have more than doubled in the past year.
The fund benefited in the past 12 months from increased spending on transport as more goods were delivered and people spent more of their disposable income on travel. The Brazilian real rose 13 percent this year against the dollar prompting more people to travel abroad.
Among the fund's best performers was All America Latina Logistica, Latin America's largest railroad operator, whose stock more than tripled.
Ribeiro graduated with a degree in Business from the University of Sao Paulo, and his first job was as an accountant at Price Waterhouse. He worked as a money manager covering Latin American stocks at ABN Amro Asset Management in Amsterdam, before joining HSBC's fund unit Halbis and returning to Brazil in 2005.
`Overlooked'
The money manager, who also helps oversee a Latin American fund and the Brazilian part of a fund that also invests in China, India and Russia, reckons the country has further room to grow, ahead of the booming economies of Asia. Memories of hyperinflation are still discouraging investors, he said.
The country's Bovespa Index shows companies are trading at about 11 times future earnings, compared with 33 times earnings for the Shanghai Composite index and 20 times earnings for the Sensitive index in India.
``People think of Asia when they think of emerging markets and Latin America is still overlooked,'' he said. ``History plays against us. It takes a while for people to get over that.'' |
