It’s been a turbulent few years for investment companies investing in Latin America but one year performance data for JPMorgan Brazil Investment Trust, BlackRock Latin American Investment Trust and Aberdeen Latin American Income Fund suggests that there has been a rally in the market.
Here are the views of some investment company managers who invest in Brazil.
Brazilian economy
Sophie Bosch de Hood, manager of JPMorgan Brazil Investment Trust said: “Brazilian equities have experienced a lot of volatility, mostly driven by concerns over the persistent recessionary environment and ongoing political turbulence.
“Weak commodity prices and worries over deteriorating demand from China have also weighed on the stock market, plus a corruption scandal at state-owned oil producer Petrobras has further cast a shadow over Brazilian business and politics. However the rally in Brazilian equities we’ve seen so far this year continues, with sentiment buoyed by the potential impeachment of President Rousseff, the rally in commodity prices and also inflows of investors looking for yield in a global ex-growth environment.
“In the short term, we remain cautiously optimistic given the recent strength in the market. We believe that the next few months will be crucial especially after the final ruling of the impeachment at the end of August. If inflation begins to come down, rates will start to come down, providing a positive environment for many companies.
“We believe that much of the recession of the past two years is down to confidence and if interim president Temer takes the right course of action, we could see confidence returning to the economy. He has indicated signs of privatisation and reforms that could put Brazil on the right track.”
Will Landers, manager of BlackRock Latin American Investment Trust, is also positive for Brazil’s economic outlook. Commenting, he said: “As the media focus on the Games and Paralympics, for us the change in guard in Brasilia with the impeachment procedures against President Rousseff is the real story.
“The ascension of interim President, Michel Temer, has set Brazil on a different economic path. Having replaced the entire cabinet, the president of the Central Bank and the presidents of the country’s major State Owned Enterprises, Temer’s pro-market government plans to get Brazil out of the current recession, bring back fiscal discipline and with it provide room for the Central Bank to cut rates aggressively once inflation is back under control.
“This we believe should place Brazil back in the eyes of investors and allow for its middle class to start expanding again, as we saw in the first decade of the 2000s. With overweight positions towards the financial and consumer staple sectors, we are more positive on the prospects for Brazil than we have been in the past 3 years.
“Elsewhere in the region, leadership changes in Argentina, positive election results in Peru and a continuation of improved domestic growth figures from Mexico with energy reform expected to begin are having a positive impact on activity in the second half of 2016, and have all helped improve investor confidence. Overall, we are positive on the prospects for Latin America going forward given the structural changes in the region and the potential for reforms and the positive implications of those reforms.”
Peter Taylor, manager of Aberdeen Latin American Income Fund, agrees that Michel Temer will boost confidence. “While the Rio Olympics may provide some light relief, Brazil will remain more focused on the ongoing political drama and anticipated recovery from deep economic recession,” he said.
“August is not only the Olympics month but is also expected to see the eventual impeachment of President Dilma Rouseff and her formal replacement by the current Interim President Michel Temer. This should bring a further boost to investor confidence on top of the first signs of an earnings recovery among Brazilian companies.”
Investment opportunities
Consumer staples are the way forward for JP Morgan’s Sophie Bosch de Hood, who said: “Against this challenging backdrop, the consumer staples sector continues to offer a number of promising investment opportunities.
“Drugstores, for example, continue to report positive sales figures and are beating inflation. We like drugstore chain Raia Drogasil which has benefited from strong execution by management, resulting in an increase in margins, an expansion in floor space and double-digit earnings growth. We are also seeing opportunities in companies that have trimmed their cost base, are well managed, and will benefit from operational leverage.
“In the long term, we believe Brazil is past the worst of the recession and we expect earnings to recover from their very depressed levels once the economy shows some signs of improvement due to operational leverage. Brazil has a big economy and although infrastructure needs development and the country’s fiscal framework is complicated, Brazil still has a lot of potential.
“The economic path is likely to be a difficult one, so we continue to prefer quality and domestically-oriented stocks with good long-term growth prospects irrespective of the impact of short-term economic conditions.”
Peter Taylor said: “The country’s economic potential is unquestionable given it is rich in commodities and with a young, increasingly educated population.
“Most importantly to us as stock-pickers, Brazil is home to a large number of well-managed companies, including Itau Unibanco which is a leading Brazilian bank with a good quality loan portfolio that has benefitted from robust growth in retail lending and Lojas Renner, the leading clothing retailer in Brazil.
“Until very recently, Brazil boasted the enviable combination of quality companies trading at depressed valuations. But given the strength of the rally seen in the market this year – Brazil has been the best performing major emerging market this year – we have taken the opportunity to take some profits across sectors.
“We maintain a structural overweight to the country as we expect our Brazilian companies to continue to deliver solid results despite the current economic headwinds.”
Olympic impact
Sophie Bosch de Hood is expecting no benefits purely from the Olympics. She said: “With regard to the Rio 2016 Olympics, we remember the level of expectation and hype created by the 2014 FIFA World Cup and would argue that Brazil didn’t really reap the economic benefits associated with being the host nation.
“The World Cup was played in 14 cities and there were city holidays for the host city of a particular game. Many of the shops were shut, so tourist spend was limited. This time round, there are no national holidays during the Olympics and Rio is the only host. We do not expect many benefits, only a long term improvement in its infrastructure. This should be beneficial to companies operating there.”
AIC Members with highest exposure to Brazil at 30 June 2016
Fund
Sector
Percent
JPMorgan Brazil Investment Trust
Country Specialists: Latin America
99
BlackRock Latin American Investment Trust
Latin America
55
Aberdeen Latin American Income Fund
Latin America
23
JPMorgan Emerging Markets
Global Emerging Markets
12
Templeton Emerging Markets
Global Emerging Markets
12
JPMorgan Global Emerging Markets Income
Global Emerging Markets
9
Premier Energy & Water
Split Capital Trust
8
Utilico Emerging Markets
Global Emerging Markets
7
Aberdeen Emerging Markets
Global Emerging Markets
5
*Source: AIC MIR
Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest.
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