He points to Iochpe Maxion, a company that produces steel wheels for the car market and heavy industrials such as trucks and trains. He says the company is expecting 70 per cent revenue growth this year, of which 46 per cent is coming from the wheels and chassis division.
“The interesting thing about the steel wheels market is that there is no replacement demand and there is no secondary market it is all about supplying the auto manufacturers directly,” he says.
Nicholas Morse, who co-manages the Schroder SISF Latin American fund, says this is what you would expect from an emerging market with a growing population and increase in disposable income: “As a result people are going to buy more consumer durables and cars are a desired item. Clearly there will be ancillary supply industry that benefits from that. Anything that supplies components domestically is going to benefit from this and steel does supply a lot of the material for cars.”
BlackRock’s Will Landers, who manages the Latin American IT says he has investments in auto parts and related companies that have also benefited from the growth in Brazil’s auto industry and should continue to do so.
Meanwhile Joanna Terrett from SWIP’s international equities team says more cars means the growth of many related manufacturing, retail and service sectors as well as road infrastructure improvements. “This is part of the disposable income growth story in emerging markets - consumption growing, middle classes growing and changing consumption patterns offering growth in many areas of the economy such as banking, retailing, media and autos. This is a trend that is likely to continue,” she says.
Data from Finanial Express points to four UK retail funds with exposure to both Brazil and the automotive sector.
Brazilian automotive exposure, 1-yr
Source: Financial Express Analytics
Claire Simmonds, a portfolio manager with JP Morgan expects a number of companies to benefit indirectly from the automotive growth. She points to Randon, which is involved in road equipment and special vehicles, auto parts, and automotive systems and product services. Another is WEG, which manufactures and distributes industrial machinery.
Barings Asset Management’s head of Latin America equities Roberto Lampl says automotive penetration in Brazil is low at less than 15 per cent; therefore it is most likely that Brazil will slowly converge towards developed market car ownership levels.
“For this to occur, you need financing and a growing middle class. The availability of financing has increased significantly over the past 10 years; up to 5 years ago the maximum term of an auto loan was 24 months. However, changes in the law have made it easier for banks to repossess assets and this, together with lower rates, has helped them extend the term of the loan to 60 months at more attractive rates.” he says.
Thompson says car finance is one of the key areas of lending, mostly against new rather than used cars, which is a riskier market. “Speaking to the banks they are all very keen to expand their auto finance portfolio and consumers are getting access to credit rates which they have never had access to before,” he says.
“I think demand is strong and the availability of finance is stronger than it has ever been so I think this trend will continue. You will probably see 25 per cent growth in auto loans this year.”