Brazilians go to the polls in October 2014 in what is widely expected to be a hotly contested election that could see the incumbent president Dilma Rousseff replaced by the more free-market supporting Aecio Neves of the PSDB party as president.A focus on subsidies and social security has contributed to a decline in foreign direct investment and some mismanagement of the economy, Simmons says, which would reverse in the event of a change of government.
The manager this could in turn provide a big boost to the equity market, which has had a miserable three years.
“Investors are expecting that if there is a change of government, Brazil will be much more market friendly. If this were to happen we would definitely be more confident and increase our Brazil exposure,” he said.
“However we are happy to miss that first 5-10 per cent market rally because it could actually be a 30-40 per cent rally over the course of a year.”
Performance of indices over 3yrs
Source: FE Analytics
“Brazil is a huge market that is under-owned at the moment and there is a lot of money on the side-lines which could come back into it.”
“There are also a lot of rally good companies which do have a long-term growth story. Investors haven't given up on Brazil but they are just keen to see signs of change before coming back to the country.”
The Brazilian stock market has been one of the fastest rising, and most volatile, over the past 10 years, outpacing the likes of China, India and Russia in terms of growth.
The MSCI Brazil has gained 426.52 per cent over the past decade compared to 121.15 per cent gain in the MSCI World.
However, the Brazilian index has been one of the worst performing within emerging markets over the past three years, losing almost 30 per cent. In comparison the MSCI World has gained almost 30 per cent.
A similar upsurge in market sentiment has been seen in another key emerging market country – India – following the election of vocally pro-business government in May this year.
The expectation of Narendra Modi’s election has seen the MSCI India index rise more than 20 per cent since February, when polls first suggested a victory for his BJP party was likely.
Performance of indices since Feb 2014
Source: FE Analytics
The €61m Charlemagne Magna Latin American fund has returned 256.55 per cent since its launch in December 2004, making it the best performer of all Latin American and Brazil focused funds in the IMA universe.
It has also stormed ahead of its benchmark – the MSCI EM Latin America index – over the period.
Performance of fund and index since 31 Dec 2004
Source: FE Analytics
A key focus of the fund’s focus at the moment is finding companies building national infrastructure projects.
Simmons says he expects a huge uptick in infrastructure spending across Latin America over the medium term, and would target Brazil if there was indeed a change in government.
“Brazil is the sixth largest country in the world in terms of population, but it is ranked 110th for infrastructure and that needs to change if it is going to grow GDP at 4 per cent again,” he said.
“It is something which has been much needed in the region for the last decade. Whilst there have been promises, not much has happened, but we are starting to see things happen now. Roads, airports, railways, oil & gas pipelines and telecoms will all see a boost.”
“The Mexican government announced huge energy reforms recently which are going to require huge investment up to $600bn over the next five years,” he added.
Simmons is bullish on Mexico and given that the Brazilian election is still uncertain, he says it is the most attractive country in the emerging markets sector at the moment. However, he points out investors are having to pay up for this.
“From a top-down macro view [in Mexico], you have the benefit of the US recovery but it also has a big internal driver in the reforms the new government is putting into place – mostly energy, telecom and financial reform.”
“The problem is a lot of stocks in the market have anticipated this good news and are looking at best fair value. We are slightly overweight Mexico and we would like to have more from a top down point of view. However, from a valuation perspective we are holding on for cheaper entry points.”
“These markets tend to be very volatile and so the shock could come from a stronger dollar or rising US yields,” he added.
For those wishing to know more about investing in Latin America, FE Trustnet recently highlighted funds and trust specialising in Latin America.
