During the early part of 2010, Brazil’s performance was slightly weaker than the wider emerging market region, primarily because of domestic liquidity condi-tions. Interest rate hikes started to be priced in and concerns regarding Chinese inflation and interest rates have also weighed down Brazil this year.
But in May, attention began to focus on the euro and the more peripheral economies in the euro zone, which have an influence on high beta emerging market countries such as Brazil.
Looking ahead, the primary concern remains risk-aversion and, in particular, the worry that this could lead to the creeping up of credit yields on a global scale, which could potentially bring markets back to a 2008-style environment.
In terms of growth, on a global scale, we expect levels to remain weak although Brazil continues to lead emerging markets which are leading economies globally.
In terms of China’s cont-inued attempt to slow its economy and the subsequent worries that it will have a negative impact on Brazil’s economy and market, so far in real terms, we have seen no impact.
Export levels, particularly commodity exports from Brazil to China, have remained very strong so far in 2010 and this has been supported by the almost 100 per cent increase in the iron ore price we experienced in April.
In the future, there is potential for a greater impact and this has been reflected by economic indicators, notably an adjustment in China’s reserve requirement levels.
For the most part, these adjustments have been targeted specifically at the property market, where the Chinese government has tried to prevent a new asset bubble developing.
Looking at the situation from the perspective of Brazil, it seems the worries regarding China have been largely overdone. We anticipate economic weakness is more likely to come from the developed regions such as Europe rather than China.
In terms of the long-term aspects the current events in Europe could have on the infrastructure theme in Brazil, we believe what is happening is a spending adjustment at both the government and the private sector level. We anticipate the European economy will remain weak for a prolonged period as these factors are difficult to adjust in balance sheet terms, particularly when each country has no means to devalue and export its way out.
Increasingly, we believe emerging markets are becoming an area which is more and more being viewed as having a lower risk profile than the rest of the world, given years of belt tightening. Emerging markets have been forced over the past 10 to 15 years into a very conservative balance sheet position, ironically, by developed markets.
From a relative risk persp-ective, emerging markets are starting to look a lot more interesting, especially as growth rates are looking better than that of the developed world’s.
We anticipate increasing inflows into the region, which will lower the cost of capital, reducing the risk profile further and making funding cheaper for things such as infrastructure spending. A lot has been spoken about the influence of the World Cup, the Olympics and the election on infrastructure and these should generally have a posi-tive outcome but the indica-tion is infrastructure spending will increase over the years, regardless of these factors.
Jose Cuervo is manager of the HSBC GIF Brazil equity fund