The biggest chunk of BlackRock Latin American’s assets are in Brazil, especially domestic plays, as more people have more money to spend and demand for consumer goods rises.
Vehicles like the BlackRock Latin American investment trust come into sharp focus as Brazil is between two rounds of voting in its presidential election. As yet there is no clear winner, but Will Landers, the trust’s manager, says despite some investors waiting on the sidelines until the result he has never thought the election would be a market-moving event.
“The top three vote getters are committed to continuing the policies of the previous government and reducing net debt levels,” says Landers. “What’s also good for Brazil overall is Lula’s [Luiz Inácio Lula da Silva] candidate didn’t get over 50% of the vote. The electorate has spoken; that’s good for the democratic process. I would say the guy in second place is seen as stronger on the fiscal side, while Dilma Rousseff will continue Lula’s policies. The differences are fairly small on the economic side.”
The trust, which was launched in 1990 and has been managed by BlackRock since March 2006, had 68.5% of its assets in Brazil at the end of August. “Brazil is 67 to 68% of our benchmark,” says Landers. “It’s the biggest, deepest, most liquid [Latin American] market. Last year it was the only market to outperform.”
”It’s the biggest, deepest, most liquid [Latin American] market”
Brazil is more than just a commodities play, in Landers’ view. “If you look at the change in the makeup of the population, there’s been a 15% shift to the middle class, which has higher purchasing power. There’s pent-up demand for all kinds of goods. Mortgages only make up 3% of GDP. We’ve got a big overweight in the domestic side of Brazil and Latin America generally.”
As a reflection of this, the portfolio is underweight areas such as materials, energy and steel, with overweight positions in banks, house builders and beverage companies.
One observation from the credit crisis was how Latin America’s correlation with America changes. “In periods of high stress these markets recouple very quickly,” says Landers. “As things settle down, Latin American markets perform well because the fundamentals are good; it decouples again. Over time I would expect the knee-jerk reaction to sell Brazil will reduce.” (article continues below)
Landers describes his investment style as bottom-up, although some themes can be identified, such as the housing sector in Brazil. The government has launched a scheme that aims to build two million homes for people on lower incomes. “The programme is going well but if you look at the middle and high income area, sales are also going very well. Rates are coming down, so people are more willing to look at a mortgage.”
At a regional level, the Andean countries of Argentina, Chile and Peru offer limited opportunities because of a lack of liquidity, but there are some opportunities to add value. Landers says Peru is the most interesting of the smaller markets, with a lot going on, although one needs to keep an eye on politics. It is the second largest country overweight after Brazil. Mexico, on the other hand, is on a big premium to Brazil and is correlated with what is going on in America. “Given our cautious view on the US, we’re cautious on Mexico as well.”
Mexico represents 16.3% of the trust, with positions in América Movil and Fomento Economico Mexicano in the top 10 largest holdings. 4.7% of the portfolio is in Peru, with 3% in Chile, 1.3% in Columbia, 1.1% in Panama and 0.6% in Argentina.
In terms of stocks, Landers highlights a po sition in Itau Unibanco, the largest private sector bank in Brazil, which is on a discount to the market on a price/earnings (P/E) basis.
In general Landers looks for stocks where he is comfortable with the management team, usually having spent time in the region visiting them. “We look at their attitude towards minority shareholders, for example.” He also notes that in Brazil most initial public offerings have been listed using high levels of corporate governance.
BlackRock has a team of four investment professionals working on the trust, headed by Landers. He says this gives him ample coverage of his investment universe.
“These companies are always coming to conferences. We have plenty of meetings with CEOs [chief executive officers]; every month one of us is travelling in the region. We have more than 650 meetings a year. We do a lot of research ourselves but we also use brokers. Most major houses have research teams based in the region. Given our size – the investment trust is only one out of five funds I manage with a total of more than $9 billion (£6 billion) – this gives us good access to company management,” he says.
Last year the trust issued convertible bonds, and it remains 10% leveraged, waiting, says Landers, for dips in the market. “We’re geared towards the market continuing to do well, with the overweight in Brazil. The ideal scenario would be for the world to potter along and where the dominant markets of emerging markets continue to do well.”