GAM’s Linsey: Brazil could be next to bow to reform pressures

GAM fund manager Matt Linsey expects a growing middle class to push through reform in Brazil if the country votes for opposition leader Aecio Neves in the upcoming elections.

Linsey, who manages the £129m GAM Star North of South EM Equity fund, notes that much-needed reforms have been implemented in other emerging markets by growing middle class populations. 

With Brazil to go to the polls in October, Linsey says Brazilian President Dilma Rousseff’s economic policies have produced poor economic growth and lack of profitability for state-run companies.

He says: “Like India, many of these problems are self-inflicted and could be resolved by a determined opposition candidate like Neves. 

“His election could result in a sharp drop in the cost of capital and a major re-rating of companies such as Brazilian multinational energy company Petrobras, which are being destroyed by current policies. However, it is not yet obvious whether the opposition will win. Despite a widespread middle-class revolt against Dilma, her status as the successor of President Lula still gives her significant support among Brazil’s poor.”

Elections in several key emerging markets have been followed by reform this year. In India, the recently voted in Narendra Modi has cut red tape to allow infrastructure investment to continue, reduced fuel subsidies to resolve the country’s deficit problem and reformed state controlled enterprises to aim for profit and growth rather than satisfying political objectives.

In particular India’s new government plans to simply its tax legislation by introducing a general sales tax and encourage foreign investment by cutting approval times for major projects, specifically for the country’s coal and defence industries.

And as well as Brazil, Linsey now expects the same middle class influences to play an impact in the Chinese economy despite the country’s lack of democratic elections. 

He adds: “Hundreds of managers and officials have already gone to prison and there is a real drive to reduce corruption at all levels. This has the potential to both improve profitability and valuations of state owned enterprises, as well as levelling the playing field for the private enterprises that  compete against them.

“Valuations in the Chinese market remain very low after years of underperformance. Although there is no election trigger, there is significant upside for many stocks if the anti-corruption drive continues.”