Brazilian momentum shows no sign of slowing

As Brazilian voters headed to the polls over the weekend, Latin American fund managers say the momentum building in the region’s most powerful nation shows no sign of slowing.

GDP growth is expected to hit 8% this year alone and while the country is still viewed in the context of commodities, managers attribute much of this rise to a marked increase in the domestic growth story.

“It would be wrong to view the region purely as a play on the world’s thirst for raw materials,” said Devan Kaloo, co-manager of the new Aberdeen Latin American Income fund, said.

“There is a strong momentum in domestic spending from private and public sector investment as well as consumer spending,” he added.

Sebastian Luparia, manager of J.P. Morgan’s Brazil investment trust, labels the country as the ‘poster child for emerging markets’.

“The combination of fiscal discipline and windfall commodity revenues over the last decade allowed Brazil to reduce external debt and build reserves,” Luparia said.

“This meant it entered the financial crisis in better shape and gave it the policy flexibility to respond to the downturn.”

High risk stigma

Despite its success in weather ing the financial crisis, BlackRock’s Will Landers, the largest investor in South American equities, believes Brazil and the wider Latin American region has been stigmatised as a high risk market.

However, Landers says Brazil should be viewed as a resilient market with strong fiscal foundations.

“Latin America has traditionally been considered a high risk equity market, caught in the boom or bust syndrome of a couple of good years followed by a hard crash,” Landers, manager of the $7bn BGF Latin American fund and $500m BlackRock Latin American investment trust, said.

“The reality is the region was able to prove its resilience during the heights of the crisis, showing that years of macroeconomic reforms had left a solid fiscal position, disciplined monetary policy, high levels of liquidity and strong corporate and banking sectors.”

Superior position

While often compared to the other three Bric nations, Kaloo considers Brazil to be in a superior position to most developed markets.

“The country’s budget deficit is around 3.4% of GDP, compared to between 9% and 11% for countries in the eurozone, Japan, UK and US,” said Kaloo.

With vastly superior fundamentals compared to the established world, there are growing concerns the liquidity provided to stabilise developed economies will move into the emerging markets and create an asset price bubble.

“However, looking at objective measures like valuation, we see no evidence of bubbles in equity markets in the region,” Luparia added.

Landers added: “We believe Brazil offers the best combination of a strong top-down story and the most attractive valuations from a bottom-up perspective. There has been significant growth in Brazil’s middle class, unleashing unmet, pent-up demand for all kinds of products and goods.”

Bullish on Brazil

It is not just LatAm managers who are bullish on Brazil. M&G’s Stuart Rhodes believes another attraction for potential investors is the dividend culture of Brazilian companies.

“Companies are required by law to pay a dividend equivalent to at least 25% of net profit,” Rhodes, manager of the £287m M&G Global Dividend fund, said.

“One example of a stock the fund invests in and favors is Banco do Brasil. I believe it has a lot of potential growth ahead of it and the shares offer an attractive yield of 6%.

“I do not believe the outcome of the general election will have any impact on our investment strategy regarding companies in Brazil.”

While the two-term reign of the popular President Lula has come to an end, managers believe the election will do little to derail the engine of Brazilian growth.

Kaloo added: “While the two candidates differ in their philosophies, the eventual winner will be mindful of Brazil’s standing among global investors, and will in the end seek to maintain much of the current framework and status quo.”

São Paolo Stock Exchange (Bovespa)