At the crossroads
Javier Murcio, senior sovereign analyst, emerging market strategies, Standish Mellon Asset Management
Javier returned from a recent trip to Brazil with a constructive view of the country. While the market has reacted largely positively to the Brazilian government’s most recent policy shifts, the road ahead is bumpy. Lack of growth in the Brazilian economy also remains a major issue as a slide into economic recession looks almost certain this year. Brazilian consumer and business confidence are also yet to show any significant rebound. Despite this negative backdrop, there are some hopeful market signs, for example a sharp increase in foreign investor interest. Javier however questions the view that this activity marks the beginning of a virtuous cycle of capital inflows and potential pressure on the Brazilian real (BRL) to appreciate.
From an investment perspective, despite risks, Javier remains hopeful on Brazil believing there is value in exposure to its fixed-income assets. On a positive note he thinks inflation should peak this year allowing monetary tightening to ease in coming months. What remains unclear, is how much of the 2016 Olympic feel-good factor can be converted into long-term economic gain; Javier believes the event should at least focus international minds positively on Brazil next year.
Brazil: a country for the future
Carl Shepherd, portfolio manager emerging market fixed income, Newton Investment Management
There is a saying that Brazil is ‘a country for the future’ but that future never seems to arrive. Carl is far from bullish on the Brazilian economy and expects a contraction in growth for 2015 and flat to insipid growth for 2016, with a weak consumer confidence and rising unemployment.
He agrees with the consensus that the outlook for Brazilian equities remains dire in the short term. However, he feels that government bonds now offer value and likes to focus on the positive from a fixed income point of view.
His reason being that Brazil is still an investment grade country and has over $360bn in foreign currency reserve. Furthermore, aggressive rate rises and BNDES (state owned development bank) reforms are underway meaning credit growth should start to slow. The next administration is also likely to be more market friendly.
There is reason to be more positive in the longer term. Carl reminds us to also not lose sight of the fact that an end to the previous culture of abuse of office coupled with impunity is a positive development despite the short term noise.
Brazil: a waiting game
Colm McDonagh, head of emerging market debt, Insight Investment
Latin America and Brazil are facing serious headwinds but if you scrape beneath the surface, there is scope for optimism. Colm highlights the need to take a discriminating approach to investing, “even countries that generate bad headlines can still present opportunity if you look hard and carefully enough.” Colm also believes, that whilst Brazil is a far cry from the heady days of the commodities boom of 2004-2008, it does represent an interesting entry point for those with the stamina to play a waiting game.