Mark Dampier: Stock valuations and World Cup fever may make Brazil a good bet
Saturday 12 April 2014
A global emerging-markets fund is often a good first port of call for investors who are seeking exposure to less-developed economies. This makes sense if your portfolio is relatively small or you prefer leaving the decisions over country and sector allocation to an expert fund manager.
A fund which is diversified across a wide range of emerging markets can also be less volatile than one concentrating on a specific region or single country.
Investors also tend to buy more-specialised funds when they are near the top of the performance tables, which is often not the best time. Looking at the Aberdeen Latin American Fund the latter is a trap investors are currently unlikely to fall into.
Latin American stock markets have been through a tough period of performance over the past couple of years.The approach used by Aberdeen across all their equity funds tends to mean they usually hold up relatively well in tougher market conditions.
This is because they focus primarily on quality and companies they believe can survive through thick and thin. That usually results in a more defensive portfolio which might look relatively dull in strongly rising markets, but performs better during tougher times.
However, this is not what has happened over the past year or so. Fiona Manning, the fund's manager, and her team have tended to have a bias towards companies which are benefiting from increasing consumption, but these stocks have fallen out of favour.
A speech last May by Ben Bernanke, former chairman of the US Federal Reserve, flagged up concerns over how emerging-market companies would fund themselves in an environment where foreign investors were pulling money out of the market.
Brazil was hit particularly badly, and given that the fund has almost 70 per cent of its assets invested there this had a knock-on effect. The Brazilian economy was seen as weaker than counterparts in the region and consumer spending has been subdued by rising interest rates and inflation. Smaller retailers were seen as particularly vulnerable and the fund's exposure to some of these companies was also detrimental.
Overall, though, Ms Manning believes that these concerns were overblown and she has consequently used the weakness in share prices to top up favoured holdings.Rising interest rates have also affected the financial sector as consumers have less appetite for loans, credit cards and mortgages.
The silver lining is that there has been no increase in the amount of people who are unable to repay their loans.Within the financial sector, Ms Manning has a preference for private, rather than state-owned, banks; and shopping-mall operators such as Multiplan, which she describes as a consumer-linked real-estate play.
Basically, Ms Manning and her team see long-term value among consumer-related companies. She notes that some are growing revenues at 10 per cent a year with scope for this to expand.
It is a similar story in other countries too, with the manager citing Parque Arauco, a Chilean mall operator, as a company for which they have high hopes. It is also worth noting that we could be coming to the end of the current cycle of sharp interest-rate hikes in Brazil. This should be good for consumption on balance.
In terms of wider earnings growth potential, Ms Manning expects around 7 per cent across the portfolio in 2014. This might not sound exciting for emerging markets, but it is solid. Furthermore, following the disappointing performance of Latin American stock markets over the past couple of years, valuations certainly look attractive.
This is not to say that stocks cannot get cheaper – sentiment will still be affected by what happens in the bigger economies such as the US and China. However, Ms Manning points out that exports make up a relatively small part of Brazil's economy and domestic consumption is more important. She notes too that the tapering (slowing) of quantitative easing in the US points to a stronger economy, which in turn should be good for countries such as Brazil and Mexico.
In conclusion, valuations have fallen to attractive levels, and perhaps the football World Cup this summer will bring the feel-good factor (and rising share prices) to Brazil. However, there are risks, not least the general election in October. A clear winner is yet to emerge and stock markets dislike uncertainty.
Timing investments is notoriously difficult. Therefore, for those who see long-term potential in Latin America, drip-feeding an investment into a fund such as this over the coming months could well prove to be a sensible approach.
Mark Dampier is head of research at Hargreaves Lansdown. For more details about funds included in this column visit www.hl.co.uk
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