Why the tide has turned in Brazil’s favour
Dean Newman, head of emerging markets at Invesco Perpetual, explains what the Brazilian government’s stimulus package means for investment in the region.
By Dean Newman, Invesco Perpetual
Wednesday August 29, 2012
On 15 August the Brazilian government announced it would invest over $60bn in the country’s roads and railways over the next 25 years.
In addition to this hefty stimulus package, we expect further announcements in the near future on plans to upgrade ports and airports as well.
We think these announcements are positive because they show that the left-of-centre government is prepared to be pragmatic.
It acknowledges the government’s need to work with the private sector in order to improve the nation’s roads, ports and airports.
It also helps to focus minds in Brasilia that the country is hosting the World Cup in 2014 and the Olympics in 2016.
As we have seen with the London 2012 Olympics, this brings international attention, which applies positive pressure to upgrade infrastructure.
Are these achievable targets?
There is healthy appetite from both infrastructure companies and investors who are keen to get involved in Brazilian infrastructure. So if the government creates an appropriate framework, the funding can be raised.
How might this affect the local economy?
Brazil has not been immune to the global slowdown. More spending on infrastructure could provide a much-needed boost to the economy in the near-term. It could also provide an alternative platform for growth in an economy that has largely relied on consumer activity, and a consequent expansion in credit, to support growth in recent years.
How great is the need for investment?
In the long run, there is no question about the need for more investment. Only 14 per cent of Brazilian roads are paved and in the big cities traffic congestion is a serious problem. There are often long queues outside ports, causing delays to imports and exports.
In addition, the main airports of the country are already operating close to full capacity, even as passenger traffic continues to grow.
A recent study by the World Economic Forum rated Brazil 118th out of 142 countries in terms of quality of roads, and 130th in terms of quality of ports. Alleviating these bottlenecks is a must if Brazil hopes to sustain and improve its economic growth rate.
How does this impact companies' prospects?
In the first instance, the national logistics plan could create new growth opportunities for companies involved in infrastructure projects.
Beyond that, improvements in infrastructure can improve productivity within Brazil as a whole, lift the sustainable growth rate of the economy and make the country a more attractive place to invest in.
We have significant exposure to Brazilian infrastructure in our Latin America fund. We have been long-term holders in Triunfo Participacoes and Ecorodovias, two companies that operate Brazilian toll roads and have expanded into port operations as well.
For Triunfo in particular, we are closely monitoring developments at Campinas airport in Sao Paulo state, where it is now one of the first operators of a privatised airport in Brazil.
Triunfo's ability to succeed in expanding Campinas airport’s operations could prove a bellwether for the privatisation of airports across the country.
If Triunfo can succeed as a private operator of an airport, this could be key for unlocking more private sector investment in infrastructure projects, beyond what has already been announced.
More recently we initiated an investment in port operator LLX, whose operations will directly benefit from the revamp of a stretch of railway linking the cities of Rio de Janeiro and Vitória. Looking ahead, the further privatisation of infrastructure also offers opportunities.
What does this mean for long-term growth?
At the moment, it seems that Brazil’s sustainable economic growth rate is capped at around 4 per cent. Whenever growth runs above that level, the bottlenecks in infrastructure become restrictive and are a contributing factor to inflationary pressures.
These pressures ultimately force the growth rate back down. By alleviating these bottlenecks, we believe that Brazil could increase its sustainable growth rate to 5 per cent or even higher.
What does this mean for the rest of the continent?
Infrastructure is an area that needs greater investment both across Latin America and throughout the developing world. As the largest country in the region and one of the most important emerging market economies, everything in Brazil gets heightened attention.
If Brazil can implement a successful infrastructure programme through co-operation between the private and public sectors, we very much hope that this can spur other countries in the region to follow a similar path, much to their benefit.
Performance of manager vs peer group over 10-yrs
Source: FE Analytics
Dean Newman heads up five portfolios at Invesco Perpetual, including the Invesco Perpetual Latin America, Emerging Countries and Global Smaller Companies funds.
His Latin America fund has a 64 per cent weighting to Brazil.
According to FE data, the manager is one of the best performers of the last decade, returning 563.45 per cent, compared with 350.97 per cent from his peer group composite.