Dean Newman of Invesco Perpetual says Brazil is currently one of the brightest prospects on the investment horizon
Arriving in São Paulo, Brazil last month for a heavy schedule of company visits and updates, I was expecting to leave the grey skies of England behind me. Sadly, this was not the case as by the end of my trip the city had witnessed its 40th consecutive day of rain. So much for St Swithin’s day falling in July! Fortunately, the inclement weather did not dampen my sunny outlook on both Brazil and the region. I saw a vibrant economy, underpinned by a thriving consumer sector that continues to benefit from 40-year low interest rates and an expanding middle-class base.
Shopping malls were filled with eager customers looking to spend their rising disposable incomes on a wide range of consumer goods. During my week long visit I also met a low-income homebuilder in São Paulo, where government initiatives have provided such businesses with added incentives to accommodate the needs and requirements of households with below-average incomes. I believe this trend of replacing sub-standard accommodation with higher-quality residential buildings will continue.
Growth
Another area I believe offers a growth opportunity is healthcare. Brazil is a culturally aware and image-conscious nation. The Rio carnival is world famous, but less well known is the number of dentists in the country – about 220,000 – which equates to about 19% of the world’s total. I believe Odontoprev, a leading dental plan company and one of our holdings in the Invesco Perpetual Latin American fund, is likely to benefit in this environment.
Other sectors likely to prosper include transportation (logistics and car rental) and financials (banks and insurance). I recently added a holding in ALL, Brazil’s largest integrated logistics company. It is the country’s only railway-based logistics supplier, insulated from future competition due to prohibitively high entry costs. Buying ALL gives us exposure to the growing agribusiness market.
With the unemployment rate in Brazil continuing to fall and interest rates in single digits, I expect consumer demand for credit to grow over the coming months. It is important to highlight that, unlike developed countries where government and consumers are overburdened with debt, the situation in Brazil is far more favourable.
Consumer demand
Credit penetration in the personal sector is low by international standards and local banks’ ability to lend has not been hampered by the need to rebuild balance sheets as they have been in Europe and the US. For this reason, I believe well-run local banks, such as Banco do Brasil, Banrisul and Parana are well placed to deliver earnings growth into this year and next. In a recent upbeat report, Moody’s ratings agency declared the Latin American region was well positioned for 2010, having emerged from the global financial crisis without incurring a substantial increase in debt, in favourable contrast to the fiscal position of many Western countries.
However, the investment case for Brazil is not just restricted to the attractive domestic demand story. Following the successful bids in hosting the World Cup in 2014 and the Olympic Games in 2016, the necessary infrastructure investment in the run-up to these events will underpin the economy. Furthermore, the signing of many new bilateral co-operation agreements with China should also bring economic benefits.
Regions
It is important to highlight the region is not just solely about Brazil. I believe the investment opportunities in Mexico, Chile and Peru are also attractive. I envisage a sharp GDP recovery in Mexico in 2010, boosted by a recovery in the US economy and the potential for earnings upgrades. The 16% fall in the value of the peso versus the US dollar over the past two years should also make Mexican exports to the US more competitive. Chile was well prepared heading into the financial crisis as it is one of the few net creditors in the world and has already started the recovery process on the back of a robust stimulus package and supportive monetary policy.
The recent election of business-friendly President Sebastián Piñera is another positive. Peru offers strong growth opportunities with significant room to expand on low credit penetration.
Another feature of the region is it offers a breadth of stock opportunities, ranging from mega caps to small and medium-sized businesses operating in fragmented industries. One example would be Marfrig, a Brazilian food processing firm that should benefit from the strong long-term growth prospects of the Brazilian beef export market. Marfrig’s UK customers include Tesco and Waitrose. After recent merger activity, the company is also a good consolidation story. Another stock example highlighting the diversity of the region is Copa, a Panama-based hub-and-spoke airline carrier. Copa is one of the most modern airlines in the Latin American region, linking North, Central and South America. It is also one of the most profitable global airlines with healthy operating margins.
Focus
A key focus for investors will be the risk of more uncertainty on the global economic front, such as a double-dip recession. Although this would have an adverse impact on Latin American as well as developed markets, we remain confident about the former, given solid domestic demand fundamentals. Due to negative base effects and the renewed rise in energy and food prices, headline inflation within many Latin American countries is on the rise again.
Against this background, and considering the substantial degree of monetary stimulus put in place over the past year or so, the possibility of rate hikes is being discussed, although we think central banks are more likely to talk tough and act more cautiously. However, if the cost of borrowing does rise, this should rebalance the mismatch between firm economic fundamentals and loose monetary policy, which I believe is necessary to maintain a positive environment for equities.
Dean Newman is head of emerging market equities at Invesco Perpetual
