The Brazilian equity market has reached a turning point and now presents a much- improved investment opportunity relative to other emerging and developed markets, according to HSBC Global Asset Management.
Until recently, Brazilian equities faced severe headwinds including a tightening monetary cycle and rising inflation. However, a surprise interest rate cut at the end of August, (reducing the country´s benchmark Selic rate by 50bps from 12.50% to 12.00%), has signalled the end of the tightening cycle.
The likelihood of further interest rate cuts is increasing and HSBC Global Asset Management in Brazil is now forecasting 2011 year-end interest rates to fall to 11% and 10.5% in 2012.
HSBC Global Asset Management believes the recent interest rate cut indicates that the Central Bank is taking a pro-active approach on monetary policy, and that it may believe the trade off between growth and inflation is at a stage where the latter may no longer be deemed as much of a threat to the Brazilian economy as previously believed.
Further deterioration in the global economic environment may result in lower demand for commodities, which in turn could ease inflationary pressures in Brazil. Therefore, HSBC Global Asset Management believes the 12 month inflation figure would have peaked in August, then should start to slowly correct (under a scenario whereby global growth slows).
Meanwhile, current valuations on the Brazilian Bovespa index are considered attractive on a 12 month forward PE of 8.7x - close to 2008 levels.
Natalia Kerkis, manager of the USD$2.1bn* HSBC GIF Brazil Equity Fund adds: "The combination of the end of the tightening cycle and further sequential interest rate falls, deeply discounted valuations and potentially returning investor flows has led us to expect there could be a market rebound in the near term, particularly in relation to developed markets."
Meanwhile, longer term positive drivers remain in place. GDP is forecast at 3.5% for 2011 (4.0% for 2012) and exports continue to grow with Brazil enjoying a positive trade balance (US$18.4bn in late August, significantly up from US$11.4bn this time last year), she adds.
Domestic consumption, which represents more than 80% of Brazil's GDP, is resilient, a key driver being favourable demographics with the middle class representing more than 50% of Brazil's population.
Although the Brazilian Real has appreciated considerably, this is not impacting negatively on the export market. Global demand for Brazil´s plethora of commodities should also continue to contribute to the country´s growth. Even though global demand is slowing, demand and prices are likely to remain at sustainable levels, Kerkis said.
Also testimony to Brazil's macroeconomic stability is the recent S&P upgrade of Brazilian local currency debt from stable to positive whilst still retaining the long-term debt rating at BBB+.
Although the outlook for Brazilian equities has improved significantly, Kerkis said challenges still remain. In particular, low infrastructure investment could become the bottleneck to future growth. The overall investment/GDP ratio averaged 17% in the past five years (until 2009) which is low compared to China's 44%, India's 38% and Russia's 24%.
In addition, the continued deterioration of the US economic outlook, persistent concerns about the sovereign debt crisis in the Eurozone, and a host of other generally negative data regarding the global economy could also have an effect on Brazilian equities. However, this could be partially offset by the stronger domestic economic story which means that Brazil is well placed to weather the storm.
Brazil previously represented the largest underweight position in HSBC Global Asset Management's BRIC (Brazil, Russia, India, China) portfolios. The managers previously considered valuations to be expensive as a result of factors such as rising inflation and further interest rate increases. But over recent months, this team, led by Nick Timberlake, has been increasing exposure to Brazil as valuations have become increasingly attractive and many of the other previous obstacles have eased.
HSBC Global Asset Management is a world leader in emerging market equities with US$139bn invested in this asset class. **
|
