Latin Finance - DRM Test - 51

Brazil portfolio investment
positive picture compared to
12 months ago. Freire helps
manage $2.5 billion of funds.
Brazil has other
advantages over Mexico, say
fund managers. The country
boasts a far greater and more
diverse range of listings,
especially among smaller
companies, where some have
been carving key niches in
the economy. Improvements
in corporate governance have
been more marked in Brazil
too since the introduction of
the Novo Mercado in 2004.
Time to trade
Brazil vs Mexico equity funds & net asset value change 2008 - YTD2012
8,000
6,000
4,000
2,000
0
-2,000
-4,000
Mexico-Equity
-Flow Cum
Mexico-Equity
-NAV % Cum
Bond market caution
But bond markets are
nevertheless signalling shortterm
caution on Brazil: rates have come down to historic lows,
inflation is likely to stay at 5% or more for the next 18 months,
and the improving economy could fuel higher inflation. In July
Mexico overtook Brazil in terms of fixed-income allocations for
global emerging market bond funds for the first time in more
than five years.
The average allocation to Brazil was 10.53% against 10.56%
Source: EPFR Global
for Mexico, according to EPFR Global’s Brandt. This time
last year, managers allocated over 2% more to Brazil than to
Mexico.
Multi-asset investor Franklin Templeton
sees more value in equities than Brazilian
bonds for the moment. “We expect growth
to surprise on the upside, which is not a
good environment for bonds – but should
help domestic cyclicals,” says Freire.
Market volatility has led to a drop in
interest from the traditional markets of
Japan and Asia in Brazilian fixed-income,
he says.
But the arguments in favor of Brazil
Brazil-Equity
-Flow Cum
Brazil-Equity
-NAV % Cum
Jan 1-09 Jan 1-10 Jan 1-11 Jan 1-12
3.33
-13.33
-30
-46.67
-63.33
-80
back yet. We are looking for
a return of interest in the
future,” he says.
Macro policies
The expected pick-up in
growth in Brazil may knock
fixed-income markets with
higher rates in the short term,
but the silver lining is that it
will underpin a stock market
recovery.
The timing and strength of
a possible economic rebound,
however, is hotly debated.
Alexander Gorra, senior
strategist and head of the
international platform at BNY
Mellon in Rio de Janeiro, sees
GDP growth this year at 1.5%
overall, but believes government measures will help stoke a
recovery that will ramp up growth to 4% or more next year.
Carlos de León, Latin America portfolio manager at Allianz
Global Investors, forecasts 2–2.5% GDP growth this year,
picking up in the second half and rising to a minimum of 4%
next year.
Freire is more bullish for this year: he thinks a recovery
“Our Latin fund has long had
a structural bias to Mexico.
That is no longer the case”
Nick Robinson,
Aberdeen Asset Management
over developed markets are compelling,
Freire says. “Five-year Brazilian government bonds are yielding
9% while the gross debt ratio to GDP is 60%. That is unusual to
find today, and now that the currency has weakened and there
is less foreign exchange risk, it looks all the more attractive,” he
says.
The US Federal Reserve has indicated it will maintain
overnight rates at or close to 0% through 2014 while rates are
decreasing in Europe and sovereign ratings are under pressure,
he points out.
Franklin Templeton is launching a new multi-asset fund
called Brazil Opportunities. This aims to capitalize on the
combination of Brazil’s relatively high rates and the good
prospects for the equity markets. Freire has been marketing this
in Asia: “The Japanese are willing to listen but are not coming
Companies and valuations
Although fund managers are generally consistent in their
optimistic prognosis for the Brazilian equity market, there is
less agreement on which sectors are most attractive.
Freire and Gorra have been adding in financials. Stocks have
been hurt by government actions to reduce spreads charged to
customers on loans as well as higher non-performing loan (NPL)
levels. President Dilma Rousseff has pressured state-owned
September/October 2012 LATINFINANCE 51
is already well established and will surprise on the upside,
including next year. Whatever the timing, managers agree that
government policies will have a significant
impact on growth. Brazil’s central bank is
likely to loosen monetary policy further
this year.
That monetary easing will be
accompanied by further measures
to stimulate the economy, with the
government working on a whole range of
measures, says de León. They are likely to
include new infrastructure developments,
including more private participation in
road concessions, ports, and airports as
well as additional tax cuts on selected
industries and a reduction in the cost of energy, he says.
Freire believes the government will act on a number of
fronts and says that there is further scope for loosening credit
controls through, for example, a slower implementation of
Basel III.
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