The Standout Performer So Far This Year
The Olympics are over now, but Brazilian equities are still gunning for gold in 2016, having already provided investors with some of the best returns so far this year. Since the beginning of January through August 19, 2016, Brazil’s Ibovespa Index is up 54.9 percent, compared to a 13.9 percent gain for the TSX Composite, and a loss of 0.4 percent for the S&P 500 Index, over the same time frame.¹
However, Brazilian stocks haven’t just been pushing ahead of developed market equities; by and large Brazil has outperformed its emerging market peers as well, with only Peru and Egypt coming close to its world-beating pace. What exactly is behind the rally in Brazilian stocks? Investors may ask. Well, a turnaround is underway in Latin America’s largest economy, that is well worth noticing.
The Tonic for Future Growth: New Market-Friendly Leadership
For all intents and purposes, leftist President, Dilma Rousseff is out. The denouement of her impeachment trial is expected to take place at the end of August. Ms. Rousseff is being accused of manipulating the federal budget and was also a high-profile political figure, implicated in the sweeping corruption scandal known as ‘Operation Car Wash’. Under her leadership, Brazil fell into one of the deepest recessions in global history, making it clear to market participants that a drastic change was needed.
In her place steps, Michel Temer, a law professor and career politician that abides by far more conservative tenets. His first order of business, assembling what Goldman Sachs has referred to as an ‘economic dream team’, to put more stringent fiscal policies in place. Brazilian stocks have so far reacted positively to the installment of Mr. Temer, gaining 19.8 percent since he has taken office.¹ Mr. Temer has also improved relations with congress, increasing the likelihood that his administration will be able to push through future legislations to help repair Brazil’s finances.
More Winnings to Be Had Should Earnings Follow GDP Growth
The International Monetary Fund (IMF) is forecasting that Brazil’s economy will start to expand again in 2017, lifting sentiment even further. The IMF believes that a lot of the factors that have weighed on Brazil in the past 3 years will dissipate over the course of the next 12 months, leading to “normalization” of the economy. This echoes the market’s call for a turnaround.
Investors have been hard-pressed to find growth opportunities in the current global environment, resulting in a notable amount of capital flowing into the emerging markets. With Brazil’s GDP growth projected to turn positive in the near-term, according to the IMF, the country could also see an improvement in corporate earnings and ultimately further support for stock prices.
Brazil is also among the many emerging market nations that is experiencing cooling inflation. This gives the Brazilian central bank room to cut interest rates, which currently stand at levels of around 14.25 percent. Loose monetary policy can serve as a catalyst to help stimulate the economy and incentivize investment in infrastructure, which is a buoyant sector within Brazil.
Top of the Podium: Gaining Access to Latin America’s Largest Economy
Brazil accounts for around 55 percent of Latin America’s total market cap², gaining this advantage from its sheer size in land mass and population, as well as an abundance of natural resources. While many growth opportunities are present in Brazil, they often exist in disjointed markets, requiring on-the-ground expertise to locate and analyse companies to invest in. This is even more so the case when trying to parse investment opportunities across the entire region of Latin America.
The Excel Latin America Fund is a unique, actively managed strategy that offers direct exposure to the recovery story that is underway in Brazil. The fund is sub-advised by Itaú USA Asset Management Inc., one of the largest asset managers in Latin America, with approximately US$229 billion in AUM, as of March 31, 2016.³
Scott Piper, the sub-adviser lead of the Excel Latin America Fund, is a growth manager by his own definition, with a focus on bottom-up investing.
As of July 31, 2016, 52.5 percent of the fund was invested in Brazil, compared to the aforementioned 55 percent for the benchmark.⁴ A prominent holding of the fund is Banco Bradesco SA, one of the largest banking and financial services companies in Brazil. Bradesco is among the names within the portfolio that the sub-adviser views as a “secular growth company”. The sub-adviser targets these types of companies in the portfolio, that it believes are, “positioned for outperformance throughout market cycles, spanning the next 3-5 years.”
From a sectoral point of view, 29.9 percent of the portfolio is in financials, 14.7 percent in consumer staples and an 11.9 percent weighting in materials, the latter being a play on the infrastructure theme that is expected to unlock the growth potential in Brazil, and Latin America as a whole.⁴
Despite a deluge of funds coming in this year, Brazilian equities are still largely under-owned by global investors. A roadmap to recovery which includes shifting to more orthodox economic policies, gradual reductions in interest rates, and GDP moving into expansionary territory, bodes well for Brazil, and the region of Latin America, overall.
To learn more about investing in Latin America with Excel Funds click here.
¹ Bloomberg data, total return, in CAD terms.
² MSCI Latin America Index data, accessed on August 21, 2016.
³ Itaú USA Asset Management Inc.
⁴ Excel Investment Counsel Inc.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing.
All statements in this report, other than statements of historical fact, and including statements regarding the future economic effects of events, are “forward-looking statements”. These forward-looking statements reflect the current beliefs of Excel Funds Management Inc. and Itaú USA Asset Management Inc. and are based on information available as of the date of this report. Actual results may differ materially as they are subject to a number of significant risks and uncertainties. Excel Funds Management Inc. and Itaú USA Asset Management Inc. have no obligation to update or revise the forward-looking statements in this report.