Attractive outlook for Brazil investment, according to fund managers

Attractive investment opportunities can be found within the massive infrastructure spend that is going on in Brazil for the 2014 FIFA football World Cup and the 2016 Olympic Games, it is claimed.

According to BNY Mellon ARX international investors are increasingly recognising the appeal of the Brazilian equity market. Rogerio Poppe, senior portfolio manager of the BNY Mellon Brazil Equity Fund, has been analysing the outlook for Brazil since the presidential election in late 2010 at which Dilma Rousseff became the country's first female leader.

‘We have worked hard to gain the clearest possible picture of how the Brazilian government and the monetary authorities will approach the issue of the current inflationary pressures the country is facing, so the recent round of monetary policy tightening was to be expected,’ he said.

‘While we remain extremely optimistic over the long term prospects for the economy, tighter monetary policy may put temporary pressure on some of the companies in which we are invested,’ he explained.
‘However, given that equity valuations are likely to be a little stretched, not least because of an expected decline in the rate of GDP growth, we remain firmly convinced that our relatively defensive investment strategy will continue to prove fruitful in the long term,’ he added.

With low levels of economic growth expected to remain a pervasive problem in developed markets, he remains positive on the outlook for foreign investor flows into Brazilian equities and says it should help support valuations.

‘While our outlook for Brazilian GDP growth is less optimistic than in the past, we don't anticipate that this will have a severely adverse effect on corporate earnings expectations. In other words, despite our expectations for fiscal and monetary tightening in Brazil, we don't expect to see a very significant sell off in the equity market,’ Poppe added.

Infrastructure has the most attractive outlook, he believes. ‘We expect the government to pursue an aggressive policy of infrastructure building, with the 2014 FIFA World Cup and the 2016 Olympic Games in Rio de Janeiro being important drivers in this respect. In addition, volumes of initial public offerings are expected to be high over the coming months, creating a number of opportunities to gain exposure to newly listed companies,’ Poppe explained.

Poppe and his team believe that hosting these events will have a beneficial economic impact on Brazil, coming principally from investments in general urban infrastructure. ‘These investments will boost economic activity almost immediately, and have the potential to lead to improvements in overall production levels in the longer term. The initial investment is estimated at around US$11 billion, but we believe the number could grow substantially to around US$25 billion as we approach the event,’ he said.

‘We believe events will help to drive much needed infrastructure spending in Brazil where recent spending has been on the low side because of the fiscal effort to reduce government debt. ‘However, in order to maintain economic growth at or around the 5% mark in the coming years, Brazil will need to make significant investments in infrastructure such as highways, railways and airports, and we should therefore expect to see an increase in concessions from the government in these areas,’ he added.

In terms of the immediate outlook for Brazilian equities, Poppe strikes an optimistic tone. ‘We maintain a very positive view, and are optimistic about prospects for long term earnings growth for Brazilian companies. At the sector level, we believe banks may currently offer potentially attractive investment opportunities. Our main source of optimism lies in the belief that banks' earnings will not be as adversely affected by regulatory changes as recent share price declines might suggest.

‘Meanwhile, current, unspectacular rates of GDP growth in Brazil lead us to take a more cautious stance on the outlook for consumer related stocks. We anticipate that the pressure on Brazilian consumers will only increase as a result of expected further monetary tightening. Conversely, our increasingly optimistic outlook for global growth has led us to take a more positive view of the outlook for commodity prices, and we expect this dynamic to support the shares of Brazilian companies involved in the basic materials sector,’ he concluded.