Fund managers have been ploughing money into Brazil following last week’s re-election of Brazilian president Luiz Inacio Lula da Silva.
Many emerging-markets specialists are tipping Latin America’s largest and most populous country as one of their favourites for 2007.
Brazil back in vogue for investors.
The re-election of the country's popular president Luiz Inacio Lula da Silva has boosted stocks and confidence, writes Jessica Bown
Craig Heron, a fund of funds manager at New Star, said: “We are keen on Brazil at present. About 7 per cent of our active portfolio is in Brazil, even though it makes up only about 0.3 per cent of the world’s stock markets.”
Latin American markets have delivered stunning returns over the past three years. Brazil’s Bovespa index is up by 122 per cent, Mexico’s IPC benchmark by 186 per cent and Argentina’s General index by 96 per cent.
Although the continent’s shares suffered when global stock markets were hit by inflation worries in the spring, they have staged a strong recovery. The Bovespa, for example, is up 19 per cent this year, almost double the return from Britain’s FTSE 100 index.
The markets have benefited from strong global economic growth and booming demand for the region’s commodities, such as copper and iron ore.
Political and economic reforms have also boosted the confidence of investors, with Da Silva leading the way. Although elected on a left-wing agenda in 2002, his pro-market economic policies have helped to stabilise and strengthen the economy.
Growth has picked up from 1.9 per cent when he took office to an expected 3.5 per cent this year. Inflation, the curse of Latin American economies for decades, has also been falling and is predicted to be 4.5 per cent for 2006, down from an incredible 2,500 per cent in 1993.
Interest rates, which peaked at 26.5 per cent in early 2003, have been chopped to 14.25 per cent, and more rate cuts are due.
After such a strong run there are, of course, questions about whether the rally will continue. But many believe 2007 will be another good year for Latin America, especially Brazil.
Jeff Chowdhry, head of emerging equities at F&C, a fund manager, said: “Brazil remains one of the fastest growing emerging markets. The country is enjoying strong earnings growth and, more important, we expect interest rates to continue to come down, providing a boost to domestic sentiment and interest from foreign investment.”
Fund managers argue that Brazilian shares are relatively cheap. The market is on a price/earnings ratio — a standard measure of value — of 10 times. This means that shares are 10 times company earnings. The FTSE 100, by contrast, is on a p/e of 13.
Heron said: “Brazil is now on a very sound macroeconomic footing, with inflation well under control and relatively
low interest rates. Added to these sound fundamentals, the market represents extremely good value for investors now.”
As in many other developing countries, the growth of the middle classes is stoking a surge in consumer spending.
Mark Urquhart, who runs Baillie Gifford’s Edinburgh Worldwide investment trust, said: “There is a trickle-down effect, as there is in both India and China. Middle-class Brazilians want to do things the middle classes everywhere like to do.” In other words, spend and borrow money.
There are risks ahead, though. Brazil is second only to Australia as a producer of natural resources and its stock market is dominated by oil and mining firms such as Petrobras and Companhia Vale do Rio Doce. High commodity prices, driven by strong demand from China and America, have been feeding through to company profits, boosting government finances and economic stability.
If global commodity prices slumped, the profits of such companies would be badly hit. That would have a knock-on effect on stock-market prices and economic growth. In addition, Brazil’s infrastructure trails that of other large developing economies such as China and India and crime remains a major problem. Philippa Gee of Torquil Clark, an adviser, said: “The prognosis for Brazil undoubtedly looks positive, but it remains a high-risk, specialist area. It’s always easy to decide when to invest in a country like Brazil, but much harder to decide when to get out, which is why I would advise individual investors to opt for a fund rather than to try to go it alone.”
Options for those keen to invest in Brazil include Bric funds, which invest in Brazil, Russia, India and China. Of these, Gee would recommend Allianz RCM Bric Stars.
Bric funds are very high risk, though, so some people may prefer to get exposure to Brazil via a more general emerging- markets fund. Gee’s favourites include those from Axa Framlington and Martin Currie, both of which offer relatively high exposure to Brazil. Axa Framlington Emerging Markets has 11.13 per cent in the country, while Martin Currie Emerging Markets has 13.2 per cent.
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