Portuguese funds specialised in Brazilian assets are delivering record returns amid increased investor conﬁdence thanks to an economy that is gradually re-stabilising
Two Portuguese mutual funds exposed to the Brazilian market have ranked top in the list of best-performing local funds, an achievement that goes beyond historical and cultural ties and provides evidence of Brazil’s recovering economy.
According to latest data from Portuguese industry body APFIPP, BPI Brasil Valor and BPI Brasil funds, both managed by BPI Gestão Activos, had 105.9% and 79.9% annual return respectively over the last 12 months to the end of February this year.
The funds outperformed the MSCI Brazil index, with a return of 66.24% in 2016, from -41.37% registered the previous year, driven by recovery in Brazil’s stock market index (Ibovespa), a soaring local currency and higher commodity prices.
This big turnaround in returns might seem paradoxical. Last year, Brazil saw the worst recession in decades, a presidential impeachment process and a number of corruption scandals involving most of the Brazilian political class. Investors, however, became more confident on Brazil’s economy after the conclusion of former president Dilma Rousseff’s impeachment process.
Rousseff was replaced by Michel Temer last August, seen as representing the centreright, which was perceived as the end of political instability. “The new president quickly adopted austerity measures meant to foster economic growth … and currently a climate of certain optimism exists,” explains João Caro de Sousa, the fund manager of BPI Brasil Valor and BPI Brasil.
“The new economic team have a vote of confidence with the market and the main drivers of the country’s economy,” reads a report from peer fund Banco Bic Brasil, managed by Victor Tofolo, which had a 26.5% return in the 12 months to January 2017.
Jan Dehn, head of research at Ashmore, argues that Brazil has entered into a ‘super-goldilocks’ scenario, with Brazilian bonds among the most attractive within emerging markets. “The Brazilian super-goldilocks scenario is rapidly unfolding as inflation moved within the central bank’s target range and growth picked up amid rate cuts and currency appreciation,” Dehn said by the end of January.
As expected, the Brazilian central bank announced a rate cut of 75 basis points to 12.25% in February, while the rate of inflation is expected to go below the official goal of 4.5% this year.
“Brazil will need to cut rates by hundreds of basis points more. Policy rates are 12.25% and inflation will fall to a low 4% handle later this year. The central bank is furthermore running down its swap book, which suggests less interven tion to weaker BRL going forward. Hence, Brazilian bonds offer double digit returns even after their strong performance last year,” Dehn explains.
At the same time, Brazil’s external balances continue to improve – the trade surplus reached $3.3bn in the first three weeks of February compared to $2.7bn for the whole of January.
“Brazil’s trade surplus is rising sharply and growth will return to positive territory this year, but there is considerable spare capacity, so inflation will continue to fall. Foreigners are lightly positioned, so we will see net inflows this year, which will push the currency up versus the dollar,” Dehn notes.
Although Brazil is exiting recession, this year’s economic growth will continue to be significantly below potential and inflation in the country is expected to experience a downward trend, Caro de Sousa notes.
The 12-month inflation rate was 4.76% in February, slowing from 5.35% in January – paving the way for a steeper interest rate cut by Brazil’s central bank in April. “It is expected that the central bank takes a more aggressive stance and pursues a deep easing cycle in 2017,” Caro de Sousa argues, noting that monetary easing will boost Brazilian equities.
However, he also warns that volatility is expected due to international geopolitical uncertainty, higher interest rates in the US and a stronger dollar, along with domestic political risk.
This feature was published in the April 2017 issue of InvestmentEurope.