Invesco gets upbeat about Brazil

There are good vibes for Dean Newman at Invesco Perpetual that Brazil and Russia will outperform established markets for his Latin American and Emerging Countries funds.


Sao Paulo isn’t on the wish list of most international travellers. For many, the place is a byword for crime, poverty and corruption. But Dean Newman at Invesco Perpetual says we have to start rethinking how we look at Brazil.

“You have to go to Sao Paulo to experience how it has a real vibe. It dwarfs New York. It’s a really vibrant city, and a place where someone can go from nothing to becoming a billionaire. There’s a new entrepreneurial spirit.”

Newman manages the Invesco Perpetual Latin American fund as well as the Emerging Countries fund, both of which have Brazil at their core.

“One of the amazing facts about Brazil is that as a nation it is now a net external creditor. I have to remind myself sometimes just how much has changed,” he says.

Newman has been buying a lot of small- and medium-sized Brazilian stocks, focusing on firms geared towards the emerging domestic consumer.

“What we tend to know in the UK is the commodity export side of Brazil, but in fact the domestic economy is gigantic, and there is a huge pent-up opportunity. Economic stability has enabled people to take proper decisions. The country is enjoying single-digit interest rates, currently at the lowest for 40 years at 8.75%. A lot of small- and medium-sized companies now have access to capital.”

Growth spluttered to a near-halt last year as the global downturn hurt exports, but Newman expects it to bounce back to 4%-5% this year. It’s not just the consumer story he is buying, though. Petrobras is the second largest holding in the Emerging Countries fund (behind Samsung), and Newman is enthusiastic about its growing ties with China. Recently China agreed a $10 billion (£6 billion) loan deal to Petrobras, and the Chinese have also invested $4 billion in a steel joint venture with Brazil. The oil company has doubled from its lows last November, although most of the gains were made by June and it has tracked sideways since then.

Newman runs more than £200m in his Latin American fund, but it’s useful to put the region into perspective by examining his Emerging Countries fund, now around £90m. He is overweight Brazil in that fund.

But his strongest bias is towards Russia. “It’s just too cheap. Both resources and consumer are cheap. The market was overly discounted last year, and now it’s a great ­reflation play. It’s a terrific way to play global risk appetite,” he says.

The Russian RTS index fell from 1,315 to a low of 498 in early March before the global bounce back began. Since then it has shot back to over 1,200 in recent trading. The rouble has also strengthened considerably as well, although it has not retraced all the falls of last year.

Newman’s other overweight plays are Turkey and the Gulf states. “You can compare Turkey with Brazil – it has a very large internal market but has always suffered economic volatility. Now it’s benefiting from lower interest rates and inflation. And it’s done this without signing up for the EU.”

Newman regards it as a “great irony” that countries such as Brazil and Turkey are near paragons of fiscal prudence and careful economic management compared with the Anglo-Saxon economies.

“Out of the ashes of the various emerging market crises from 1994 onwards have come companies that are focused on profits, cash generation and treating shareholders appropriately. Having to seek help from the IMF was a huge kick up the backside to many of these economies. They are now in the position where they can afford to loosen their fiscal stance without the currency tanking.”

He says enthusiasm for “de-coupling” theory went too far – but that abandoning the concept is just as dumb. “What does de-coupling really mean? The world is correlated, you can’t get away from that. But it doesn’t stop emerging ­markets from having a better growth profile.”

Newman is relatively neutral on China, with 12.9% of the Emerging fund held in Hong Kong stocks and 6.2% in mainland listings. Some consumer stocks are looking expensive, although he’s hardly negative on the region. China Mobile and China Insurance are both among his top 10 holdings.

The major underweight is India. Newman supports a Bric-style approach to emerging markets investing, but he can’t find many stocks in the sub-continent that interest him.

But whereas he has enjoyed great performance figures on his Latin American fund – it is first quartile over both one and three years – the Emerging Countries fund has yet to sparkle. Not that it’s a terrible laggard – it has given investors more than 22.3% over the past year compared with the sector average of 22.5%.

One problem is that the fund went defensive last year, which worked well, but Newman held on to the position a tad too long. “Where we were in Q1 should have been a reminder to me to tone it down a bit. For example, we were overweight Israel and underweight Korea, and when markets moved, Korea shot ahead. Israel had been the right place to be, but we held on too long.”

He says that since May the fund has outperformed the average emerging market fund, as the bounce has broadened out across sectors. “We have not gone mega-aggressive, but we have now toned down some of the defensives.” He has even been buying banks in Dubai, avoided by other investors because of the extraordinary boom-bust in the property market. Newman compares Dubai to Pudong in Shanghai, and says that, eventually, the city will recover.

The major risk to the emerging markets story is a systemic shock to the global financial system. We have had that, and countries that in previous shocks would have taken years to recover – such as Brazil – are now among the first to climb back. It gives Newman every confidence that emerging markets will continue to outperform established markets in the coming years.



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