View more on these topics

The buoys from Brazil

The Brazilian economy should hold up well following the re-election of president Lula

Brazil’s presidential elections proved to be a minor event for markets. For the first time since Brazil returned to democracy in 1985, the candidates were in agreement on the need for responsible monetary and fiscal policies so there was much less at stake for investors.

With the economy exper-iencing unprecedented stability, there was not much support for radical change. As Lula da Silva begins his second and final term in office, markets can expect more of the same policies he followed in his first term.

The combination of strong growth in real wages and expansion of the Bolsa Família subsidy programme, which gives monthly cash payments to some 12 million poor households, cemented Lula’s popularity among the poor. The inability to criticise the government’s economic record proved a fatal handicap for the candidacy of outgoing Sao Paulo state governor Geraldo Alckmin, despite a corruption scandal involving Lula’s party.

There is some concern that Lula’s second term will be dominated by ideologues from the left wing of his party but this does not seem likely, given that Lula is a pragmatic leader who is well aware that his re-election is largely due to the economic stability of his first term and who has little incentive to deviate from market-friendly economic policies. To strengthen his support in Congress, it is likely that Lula will concede positions in his cabinet to his coalition partner, the centrist Partido do Movimento Democrático Brasileiro, providing further support for a pragmatic second term.

The domestic economy has been accelerating, fuelled by strong consumer demand as wages rise, interest rates fall and banks step up lending. This should help corporate earnings to grow at a healthy pace although the economy is expected to grow a mere 3 per cent this year. The economy is well positioned to weather any global volatility, with the government now a net external creditor and the current account expected to post a small surplus this year and next.

The Brazilian market did not escape the correction of May and June, which saw the Sao Paulo Stock Exchange fall from 41,979 to a low of 32,848 before rebounding to the current 39,262. Valuations remain attractive at only nine times consensus earnings for the next 12 months – the lowest price to earnings’ multiple of any emerging market, according to Bear Stearns.

International investors are overweight in Brazil but local investors have long preferred to invest in fixed income due to high interest rates. As rates have fallen from 19.75 per cent to 13.75 per cent over the last 15 months, with inflation expected to be 4.2 per cent over the next 12 months, local investors are expected to increase their exposure to equities. Lower rates should also provide a further boost to domestic consumption and lead to faster GDP growth.

The Brazilian market is roughly evenly divided between global commodity players and domestic stocks. We are positive on the outlook for the two commodity heavyweights – fast growing oil company Petrobrás and iron ore producer CVRD – but expect better earnings growth in the domestic sector. We particularly like stocks in the banking, utilities, housing and retail sectors.

Banco Itaú, perhaps the most sophisticated Brazilian bank, is best positioned to make the transition from the traditional banking model of betting on market volatility, which in a stable macro-economic environment is no longer viable, to the more classic banking business driven by lending. We expect it to continue generating a return on equity in excess of 30 per cent over the next few years.

We like clothing retailer Lojas Renner, which is benefiting from stronger consumer spending power, and also favour Energías do Brasil, which is increasing generating capability while rising energy demand is leading to higher electricity tariffs and the regulatory environment is becoming more investor-friendly.

Urban Larson is director for emerging equities at F&C


Steer says the mid cap fits for New Star alpha

New Star UK alpha fund manager Tim Steer believes that if he had maintained the fund’s mid-cap exposure at around 80 per cent since the funds’ launch, it would have achieved greater outperformance.The fund has returned 89.3 per cent after five years compared with an all-companies sector average of 46.6 per cent.Steer says the five-year-old […]

Bills to set out pension reform

The Queen’s speech put forward a bill for state pension reform and possibly another bill on personal accounts.

FSA centre receives CCA accreditation

The FSA’s Firms Contact Centre has received accreditation from the UK’s professional body for contact centres.The Contact Centre Association presented the award to the FSA in a ceremony in Edinburgh this week.A restructure of the contact centre was implemented in April as part of a commitment to make the regulator an easier place to do […]

FSA presses Pru to share fund surplus

The FSA is understood to be pressing Prudential to hand policyholders a share of the 8.7bn surplus in its with-profits fund to clamp down on the treatment of inherited estates. It has asked for a complete review of the assets and liabilities of the fund.

A tough start for 2017 consensus trades

By Kacper Brzezniak Every year, starting around November, investment banks (and fund managers) begin to drip out their outlooks for currencies, rates, economies, you name it, for the following year. The consensus has been largely wrong for the past four or five years; those multiple rate hikes never came, the bond market is still alive […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm