Brazil offers redemption from the credit crunch, making it one of the more attractive emerging markets for 2008.
Brazil offers redemption from the credit crunch
By Elaine Moore
Published: January 25 2008 17:37 | Last updated: January 25 2008 17:37
Lowering inflation, a stable political situation and a raft of interesting mid and small- cap companies is driving increased investor interest in Brazil – making it one of the more attractive emerging markets for 2008.
Those who put their money into emerging markets such as Brazil enjoyed a profitable year in 2007. But uncertainty about wider economic markets has made it more difficult for analysts to predict the performance of emerging markets over the next 12 months.
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However there is evidence, says Fiona Morrison, investment manager in the Aberdeen Asset Management Global Emerging Markets team, that the company managers on the ground in Brazil seem far less concerned than this than analysts on trading floors.
“Company management of large companies such as Petrobras and CVRD are still upbeat on pricing and demand prospects,” she says.
There has been a lot of money flowing into Brazil in recent years and an increased demand for stocks. In terms of the growth and opportunities available, Morrison says Brazil is an interesting country for investment.
Private investors have already been getting exposure through Latin American or emerging market funds, such as the Neptune Latin America fund and the Templeton Emerging Markets Investment Trust.
The consensus is that these investors have been attracted by the improving political and economic stability in the country. Hyperinflation was halted in the mid- 90s, but the country only managed to get interest rates down to low single digits in the last couple of years. It now stands at 11.25 per cent.
“Over the longer term we expect further interest rate cuts, thought we don’t think they are likely this year,” says Morrison.
Lower interest rates make it easier for companies to make plans for the long term and allows for stronger bank lending.
The performance of large stocks such as Petrobras, which rose 139 per cent in the last year in US dollar terms, has been impressive. Large cap commodity stocks make up a large portion of Brazil’s market, but Morrison says that smaller domestic stocks may offer more stable investments over the next year.
However, in the last quarter of 2007, Brazilian stocks became increasingly volatile in reaction to the crisis in the US.
“What will affect Brazil is what will affect all markets globally – the macro economic future,” says Nicholas Morse, manager of the Schroder Latin American fund. “But the fundamentals in Brazil look positive.”
He believes growth is likely to remain stable at 4 or 4.5 per cent and inflation will probably stay low at the same percentages. This, he says, is a very nice economic background to trade against.
One stock favoured by Aberdeen Asset Management is Bradesco, one of the largest banks in Brazil. Over the past year it has grown by 17 per cent in US dollar terms, says Morrison.
Another company it highlights is Lojas Renner, the department store. “The provision of credit means people have more purchasing power in Brazil now,” says Morrison.
“In 2007 Lojas Renner grew 60 per cent and in 2008 we expect consumer demand to hold up and be able to withstand the volatility of the wider global economies.”
Compared with other Latin American markets such as Mexico, Brazil has performed well and analysts say it still has scope for faster GDP growth. Brazil’s year-on-year GDP growth stands at 5.6 per cent, whereas in Mexico it is 3.7 per cent.
Urban Larson, head of the Latin America team at F&C Investments, says he also remains positive on Brazil for 2008.
He picks out the homebuilder MRV and the stock market, the Bovesta, as interesting options for investment.
Compared with alternative emerging markets or the other Bric (Brazil, Russia, India and China) countries, Brazil is notable for being relatively cheap, stable and full of dynamic mid-cap companies.
The question investors must ask themselves is whether Brazilian companies can deliver short-term performance growth as well as the mid to long-term growth expected.
Last year the Brazilian market grew 52.6 per cent in dollar terms. But over the last month it dropped 9.3 per cent, although this is less than the 10.3 per cent that the SNP 500 has fallen.
Jeffrey Caisson, investment director at Scottish Widows Investment Partnership, says he expects that from a stock market perspective, Brazil is likely to continue to see volatility as the market digests global economic issues and attitudes to risk change.
But economically, the domestic economy seems robust, he says. And from a medium-term investment perspective, the market in Brazil remains very compelling, with the volatility highlighting some interesting, dynamic stock opportunities for those willing to look.
Copyright The Financial Times Limited 2008
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