Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Xavier Hovasse, fund manager, Emerging Markets Equities, Carmignac Gestion.
In 2012, the Brazilian stockmarket, the Bovespa, was worse hit than the Chinese market as investors fled risky assets. An interesting change also occurred. Traditionally, interest rates and stockmarkets are inversely correlated (as rates fall, markets rise, and vice versa). But unusually, massive interest-rate cuts failed to stimulate the Brazilian market. Much of this was down to issues in the real-estate sector, which plunged despite normally being the biggest beneficiary of declining interest rates.
Yet this blow-up in real estate wasn’t caused by funding problems, excessive debt, or even high prices. Instead, it was primarily due to operational issues – labour shortages and bureaucracy preventing growth in the sector – which then in turn hit the Bovespa.
Last year also saw the Brazilian market split in two: some firms and sectors became effectively uninvestable, due largely to government intervention. In Brazil, the government interferes in all major parts of the economy.
For example, it forces oil firms to buy the things it needs locally, thereby reducing profitability. Public banks are made to lend aggressively at lower interest rates, creating unfair competition for some private banks. Telecommunication firms are forced to invest massively to improve their networks if they wish to sell additional SIM cards.
All of this means that uninvestable firms account for 80% of the index, as they include heavyweights in the oil, commodities, banks, utilities, telecommunications and real-estate sectors. The remaining 20% (investable firms) are made up of malls, some infrastructure plays and a few good consumer stories. The fact that brewer AmBev has become Brazil’s biggest company by market capitalisation, ahead of national oil company Petrobras, is a consequence of money chasing these firms.
Brazil’s return to growth means that GDP estimates for 2013 are expected to be around the 3%-4% level. The 5.25% decline in interest rates combined with the government’s fiscal stimulus has certainly helped. Unfortunately, this growth does not look to be entirely healthy as it is supported by unsustainable policies.
For example, tax breaks on vehicle purchases have boosted automobile production, but this is a one-off factor. Furthermore, Brazil’s currency, the real, is overvalued, and this has penalised the industrial segment, particularly exporters. The recent depreciation of the currency hasn’t helped much yet, as it makes imports more expensive for domestically focused firms.
As for investments, while it is still too early to buy the financial sector, we continue to have large positions in brewer AmBev (NYSE: ABV) and food and electronics distributor CBD Pão de Açùcar (NYSE: CBD). At CBD, a long-term shareholder, Casino, has taken control and should improve cost control and potentially rationalise the business. Overall, it has the largest Brazilian food retail network, with 14% market share, and is the only distributor to serve all social classes in Brazil with its large range of stores.
AmBev, meanwhile, is the world’s fifth-largest brewer and largest Pepsi bottler outside the US. Operating in 14 countries in the Americas, it also enjoys sustainable double-digit earnings growth in the promising Latino-American beer markets.
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.