Strong domestic consumption driving the economy in Brazil brings opportunities for investors, it is claimed

News - Banking

Written by Ray Clancy

Tuesday, 16 March 2010 09:10

There is more to Brazil than exports to China and investors need to know that strong domestic consumption drives the economy more than commodity exports, it is claimed.

Figures released this week show a 4.3% growth in Brazil’s GDP in the last quarter of 2009 compared to the same period in 2008. This included a 1.9% increase in household consumption and 4.1% increase in consumer due to the government’s stimulus measures, including tax cuts, according to JP Morgan whose Brazil Investment Trust taps into local consumption.

The Trust will focus on these investment opportunities by investing in domestic infrastructure, communications, financial services and consumption rather than tracking the index which is overweight commodities, the finance house said.

According to Sebastian Luparia, manager of the recently launched JPMorgan Brazil Investment Trust, the greatest investment opportunity in Brazil is the country’s consumption driven economy demonstrated in the latest positive GDP figures. However this consumption is not reflected in the MSCI Index.

‘There is a misconception that the investment case for Brazil revolves around iron ore and oil, which are exported to China. However, exports only make up 10.5% of Brazil’s US$1.77 trillion GDP compared to 60.6% driven by domestic consumption. To gain access to the domestic market investors need to look further afield than the Brazil MSCI which is dominated by the energy and commodity sectors and two companies in particular, Vale and Petrobras. There are only 69 stocks in total in the MSCI Index whereas this investment trust is investing in a wider universe of over 200 companies,’ explained Luparia, who has been investing in Latin America for over 17 years.

JPMorgan Brazil will be the only UK Investment Trust focused on Brazil, offering access to companies exposed to the domestic economy through a London listed investment vehicle. The Trust will focus on opportunities offered by smaller sized companies that are likely to experience significant growth and will favour sectors likely to benefit from domestic consumption such as the retail sector, domestic consumption, technology and education, he said.

‘Domestic consumption and growth will dominate the portfolio but if we find growth opportunities in commodities, for example, we will invest. However, our aim is to be significantly diverse from the index as we see rising public and private sector investment as driving economic growth rather than exports of commodities, so our portfolio weightings will always reflect this,’ he added.

David Barron, Head of Investment Trusts at JP Morgan Asset Management said that as well as offering access to domestic stocks the JPMorgan Brazil Investment Trust has the added advantage that its fixed capital structure allows the manager to invest in stocks with a long term view, rather than being constrained by ensuring a high level of liquidity as with open ended funds.