Baring Emerging Markets fund manager Paul Wimborne has reduced his weighting in Brazil in favour of the cyclical growth on offer in South Korea.
Wimborne, who uses both a bottom-up and top-down approach in the £44.6m fund, is cautious over Brazil following the market’s impressive growth in 2009.
He has reduced holdings in the South American country from 20% to 14% to rotate into South Korea.
Wimborne believes developed economies could achieve surprise levels of positive net growth in 2010 and as such has increased exposure to South Korean firms such as Samsung Electronics.
“We have been underweight in South Korea for a long time, but we have increased our weighting because if developed economies pick up there is a good chance corporate capital expenditure could also go up,” Wimborne says.
“As a result, we have increased our exposure to more cyclical parts of the global economy and South Korea is one such market that would benefit from a cyclical pick up.”
Wimborne says while Brazil remains exciting in the medium to long term, much of the potential is already priced into the market.
“Brazil is now trading at an all-time P/E valuation high, and its valuation relative to other emerging markets is also at an all-time high,” he says.
“Share prices in Brazil have done so well over the last year we have concerns over the valuations we are seeing there.”
There are also concerns over this year’s general election, Wimborne adds. Brazil’s incumbent president, Luiz Inácio Lula, is coming to the end of his term and must stand down this year.
Meanwhile, the president of Brazil’s Central Bank, Henrique de Campos Meirelles, is considering standing as a candidate in the October polls.
Brazil’s central bank is regarded as one of the most credible and a change in leadership represents further potential risk, Wimborne believes.
“These concerns may prove to be non-events, but given the market is trading at an all-time valuation high and there are significant risks this year, we believe a lot of growth prospects have already been priced into the market,” Wimborne adds.
“We will wait and see how these things develop before we increase our weighting again.”
