Data from FE Analytics shows that while the world market has made 37.27 per cent over two years, the Brazilian market has lost 6.81 per cent, hit by falls in the commodities sector and China – its biggest importer.
Performance of indices over 2yrs
Source: FE Analytics
Some managers favour the country as a potential cheap source of exports, while many also point to the growing middle class as presenting opportunities.
FE Alpha Manager Robin Hepworth, who runs the £222m Ecclesiastical Higher Income fund, falls into the former camp.
"The market has been trouble and that’s the sort of thing that gets us interested," he said.
"What we liked about Brazil was not only that the stock market is out of favour, but the currency too, which is a great benefit for exporters."
"Banco Santander Brasil, one of the biggest banks in the country, has a solid capital ratio. The Brazilian banks’ share prices have been decimated and, with the decline of the currency, we think Brazil will be in a very strong position over the next few years to increase exports."
"Valuations look very compelling, as does the yield on Banco Santander."
Many analysts have issued warnings over the last couple of years that the country is strongly linked to the Chinese economy, meaning that it could underperform until China picks up. However, Hepworth thinks this is not a problem.
"There are close ties to China, as China is a big importer. It’s easy to get misconceptions about China. Growth has slowed, but it’s still very strong growth, so I am not sure that’s a factor for Brazil’s weakness."
"One of the strengths is those large trading partners growing at a healthy rate."
FE Alpha Manager Graham French, who runs the £4.43bn M&G Global Basics fund, says that he too wants to get into Brazil, drawing up a list of stocks he is interested in, although he thinks the market may fall a little more before it is time to buy.
"Brazil was the star market a few years ago and was where our analysts at M&G were flying too most frequently, often the sign things are a little bit inflated. I saw the expense slips and London to Rio was the most common."
"The market is down around 20 per cent now, so pretty close to bear market territory. There are some very good companies in Brazil and my colleague Matthew Vaight [of M&G Global Emerging Markets] has done a tremendous job in that country."
Vaight’s £1.1bn M&G Global Emerging Markets fund has 13.4 per cent in Brazil, overweight relative to the 11 per cent of the index. Oil company Petrobras is a top-10 holding, at 2.3 per cent of the fund.
The fund has slightly outperformed the MSCI Emerging Markets benchmark over the past three years, a poor period for the sector, making 1.6 per cent while the index has lost 0.81 per cent.
Performance of fund vs index over 3yrs
Source: FE Analytics
"He believes in that country, we have good companies in Brazil, it’s a dynamic market – you can see that in consumer spending," French continued.
"Brazilians love to spend, love brands, love new cars and so on. That’s heaven for this fund."
"We have a drawer full of companies we want to buy at better valuations, a few in Turkey and a few in Brazil, and we are waiting to see these companies come down to a price that’s attractive to own them on."
French says that he hopes to rotate his portfolio more to the emerging markets in general after a period of falling prices in those markets, aiming for 20 per cent in the region by 2020. He says Brazil is one of the most attractive areas.
"We have waited to get into those areas until valuations made more sense," he said.
FE Alpha Manager Algy Smith-Maxwell, co-manager of the Jupiter Merlin range of funds of funds, says that he also finds the region interesting on valuation grounds.
"We have retained our exposure to Latin America, which is on discounted prices," he said.
"It was hit very hard in the middle of this year: valuations have now bounced back, but it has lost quite a bit in the short-term."
"The stock market in Brazil has been hit by negative sentiment towards China. But Jaguar are opening a plant in Brazil and that's an example to me that the middle-income Brazilian consumer is alive and well."
Smith-Maxwell uses the five crown-rated Findlay Park Latin American trust to access the region, but unfortunately this portfolio is institutional only.
For the retail investor, it is hard to know where to turn for Brazil exposure.
The Allianz Brazil fund has been falling in size this year and now stands at only £18.7m in AUM. It has also underperformed the MSCI Brazil 10/40 benchmark since launch in September 2010, losing 27.84 per cent.
Performance of fund vs benchmark since launch
Source: FE Analytics
Retail investors are most likely to access the country through a Latin American fund. The country dominates the region in terms of the size of its economy and features large in many of these portfolios.
The £107m First State Latin America fund, which has five FE Crowns, has the best result over three years, making 9.62 per cent while the MSCI EM Latin America benchmark has lost 17.77 per cent.
The fund is unafraid to take an off-benchmark approach, and while 32.5 per cent of its assets are in Brazil – against 55.7 per cent for the index – 44.2 per cent is in Chile – which makes up just 8.7 per cent of the index.
Invesco Perpetual Latin America leads the funds over five and 10 years, making 396.66 per cent over the last decade.
Performance of fund vs benchmark over 10yrs
Source: FE Analytics
The £455m five crown-rated fund, managed by Dean Newman, has 61.82 per cent in Brazil, meaning it is overweight the country and a better option for investors wanting access to it.
The fund has made 122.91 per cent over five years while the Neptune Latin America fund has made 115.97 per cent. The index has made 105.28 per cent in that time. The Neptune fund has just 25.3 per cent in Brazil.
