Lifted by the consumer boom in Brazil
By Hugo Greenhalgh
Published: August 31 2008 19:42 | Last updated: August 31 2008 19:42
Investing in Latin America is mainly about the commodities story, says Neptune’s Felix Wintle. As manager of the firm’s £16m (€20m, $29m) Latin America fund he has been playing both the soft and hard commodity markets.
Prices are likely to moderate, he says, “but are also likely to stay higher than historic norms because of the massive demand surge from China and the other emerging economies”.
Brazil, as the provider of 30 per cent of the region’s gross domestic product, is the key market.
“It is the biggest economy and the most important,” adds Mr Wintle.
Some of the world’s major oil providers may also be situated in the region, but the political risks outweigh the potential benefits. Venezuela, for example, is off limits. “It may be one of the big four economies,” explains Mr Wintle, “but it also has Hugo Chavez [as president] and therefore is not an investable proposition because there is too much political risk.”
These issues are typical to emerging market investment – as are many of the investment themes. The rise of the middle class consumer – and the ancillary benefits they bring to the overall economy – is a central plank of Mr Wintle’s investment strategy.
“The consumer story is one shared by the other Bric economies,” the manager explains. “There is a wealth effect and this helps consumer spending.”
Uniquely in Brazil, as opposed to Russia, India and China, there is already an infrastructure in place to give consumers credit. Put simply, with both cash in their pockets and credit on their cards, Brazilians are enjoying their new-found economic stability in time-honoured fashion by spending.
In turn this has had an ameliorative effect on the financial sector. “The banks are lending a lot of money to consumers,” says Mr Wintle. “There is a real boom in car loans; the car industry is growing very quickly in Brazil; and banks are able to enjoy very generous profit margins on consumer lending.”
Ancillary sectors such as real estate and consumer discretionary companies are also beneficiaries – and remain the main themes within the 50-stock Latin America fund, Mr Wintle explains.
Outside Brazil, the investment landscape becomes more varied. Neptune as a house follows a top-down investment process irrespective of geography to start off with. Two people are assigned an MSCI sector with one of the members feeding in their views on any sector globally. “We then construct our sector views based on our own internal research,” explains Mr Wintle. “Next, we conduct our own bottom-up work and choose stocks to populate those sectors that we think are the right ones to be in given any time in the business cycle.”
This has led to investment in Mexico. “It had seen a lot of 2008 in double-digit return territory,” Mr Wintle adds. “It is coming off a bit now and following commodity prices down.”
Peru and Chile have also performed well – as has the main market Brazil – but once more the manager is prevented from investing in other high-performing markets.
“Columbia has performed pretty well, but we can’t invest there because it has capital controls,” Mr Wintle says. “Argentina is a very frustrating country because it has so much potential but is dogged by politicians and politics. We are steering clear of Argentina as well.”
Ultimately, despite the hurdles the outlook remains relatively benign. |
