First State Latin America fund avoids ‘fashionable’ Brazil on valuation fears

Soaring stock market performance in Latin America makes it hard to find quality companies at reasonable valuations, especially in Brazil, according to First State’s Millar Mathieson.

The co-manager of the £104m First State Latin America fund says although he maintains a sanguine outlook on much of Latin America, he has steered clear of fashionable stocks – particularly in Brazil.

The fund is positioned defensively, with no exposure to names such as Brazilian state-owned Petrobras, which constitutes a large proportion of the MSCI Latin American index.

“Even in places such as Chile, where we have built a significant exposure since the fund’s inception, there are now limited opportunities,” says Mathieson.

“Our investment horizon of three to five years means we disregard a great deal of short-term ‘noise’ and focus our attention firmly on business fundamentals.”

He also expressed concern liquidity in the region is a function of quantitative easing and monetary policy in the US as well as other developed markets, which could
be a source of volatility if the tide turns.

“The macroeconomic picture is encouraging, with Latin American governments having avoided the fiscal predicament of many Western nations. However, as inflation rears its head, tighter monetary policy is likely to follow.

“We continue to favour companies that are ‘price-givers’ rather than ‘takers’ as this offers some protection against rising costs.

“The influence of China, via its hunger for resources, is evident. Should it fail to keep up its breakneck pace of expansion, this will have tangible ripple effects on Latin American economies.”

Mathieson says his strategy is to sell stocks that look overvalued and focus on companies with less risky profiles, to help provide stability in the event of turbulence.