Introduction
Investors in the MSCI Brazil index would have recorded a loss of 44.8 per cent in the 12 months to September 30 2015, according to FE Analytics data. This is significantly worse than the already disappointing 13.6 per cent decline in the MSCI Emerging Markets index in the same period.
Sentiment in Brazil has been weighed down by events in China and a slowdown in emerging markets generally, but political concerns, a tumbling currency and the recent downgrade of the country’s sovereign bond rating by Standard & Poor’s to ‘junk’ status, have not helped.
Javier Murcio, director of emerging markets at Standish Mellon Asset Management, says: “The rationale behind the rating highlights the rapid deterioration, over the course of less than two months, in the fiscal situation and the implicit confirmation that the political ability to introduce serious reforms is non-existent.
“The absence of a strong political commitment makes it difficult to make serious cuts, although there is hope that the downgrade would put pressure on politicians to approve necessary reforms.”
But it’s not just Brazil that has been under pressure. The MSCI Emerging Markets Latin America index, which is comprised of 130 large- and mid-cap companies across five Latin American emerging markets – Brazil, Chile, Colombia, Mexico and Peru – has declined 34.4 per cent in the past 12 months.
Of these individual markets, the MSCI Colombia index has fared worst with a loss of 47 per cent, while the MSCI Chile index is the best of a bad bunch with a fall of 13.6 per cent.
Will Landers, manager of the BlackRock Latin American Investment Trust, is maintaining a defensive portfolio and high levels of cash.
“At the country level we maintain above-benchmark exposure to Mexico given the continued improving performance of its domestic economy,” he notes in a recent portfolio update.
“Brazil continues to suffer from weakening economic activity and significant political turmoil. In addition, we do not believe market forecasts have bottomed out yet. Chile and Colombia continue to deal with weak commodity prices, and the impact they have on their respective currencies as well as fiscal accounts.”
Elsewhere Peru has also struggled, with its index falling 21.1 per cent in the 12 months, with MSCI recently announcing that liquidity concerns could potentially force it to downgrade Peru from emerging market status to frontier markets in its 2016 Annual Market Classification Review.
A recent economics research note from Goldman Sachs forecasts a disappointing macro environment for the region. It estimates real GDP growth in Latin America of -0.2 per cent this year, and just 1.7 per cent in 2016.
The note adds: “Against a more favourable global backdrop, the divergence between those economies with more challenging (Brazil) and more stable (Mexico) policy outlooks is likely to increase.
“In Brazil, we forecast real GDP growth of -2.6 per cent in 2015 and -0.4 per cent in 2016. For Mexico we expect 2.3 per cent and 3.5 per cent, respectively. Over the summer, Brazil’s real sector data worsened, credit and financial conditions tightened further, the labour market deteriorated rapidly and political/institutional risk rose.”
With such a negative outlook, investors need to take a careful look under the bonnet before parting with their cash.
THE PICKS
JPM Latin America Equity
Launched in 1992, this $793m (£524m) fund is managed by Luis Carrilllo and Sophie Bosch de Hood with an emphasis on bottom-up and top-down fundamental research. For the 10 years to October 1 it has delivered a respectable 46.1 per cent return, ahead of the 39.4 per cent gain in the MSCI Emerging Markets Latin America index. The fund’s largest geographical weighting is to Brazil at 53.7 per cent of the fund, while the largest sector exposure is to financials at 37.8 per cent.
BlackRock Latin America Investment Trust
Managed by Will Landers, this investment trust has total assets of £137m and aims to deliver long-term capital growth and attractive total return by investing in quoted securities in the region. The investment trust tops the AIC Latin America sector across one-, three- and 10-year periods, delivering a 10-year total return of 41.6 per cent, according to data from FE Analytics. The trust’s largest geographical weighting is to Brazil at 46.3 per cent of the portfolio, while financials is the largest sector allocation at 32.8 per cent.
EDITOR’S PICK
Magna Latin American
This Dublin-domiciled fund is one of the smaller options at just ¤18m (£14m), but has delivered the strongest performance across the 10 years to October 1 2015, with a return of 61.6 per cent. Managed by Ian Simmons and the team from Charlemagne Capital, the fund has an average of 30-60 holdings, with its largest geographical weighting in Mexico at 47 per cent of the portfolio. It also holds 42 per cent of the portfolio in Brazil, while the largest sector weighting is to financials at 28 per cent of the fund.
