They've got an awful lot of potential in Brazil – and not just in coffee

Investors looking for better returns when considering their near-deadline ISA shares could do worse than consider Latin America

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The Independent Online

Think Brazil and what pops into your head? Carnival, football or the girl from Ipanema perhaps, but bumper investment returns? Unlikely.

The least heralded of the Bric countries – Brazil, Russia, India and China – is still a bit of an investment backwater, accounting for around 2.5 per cent of the world's share trades, and with a stockmarket dominated by a handful of commodity and resources companies.

Add in a history of high inflation and a continental debt crisis in the recent past and you may think Brazil – and Latin America as a whole – should be low on your list of investment possibles as this year's individual savings account deadline approaches. But you could be turning your back on a major opportunity to add a bit of much needed growth to your investments.

"Brazil is among the most economically vibrant countries in the western hemisphere. Its population of almost 200 million represents a growing and upwardly mobile consumer market," says Mark Mobius, the executive chairman of Templeton Investments, and for 30 years the doyen of emerging markets.

In fact, many observers cite Brazil and other Latin American economies such as Mexico and even Columbia as the place to be in 2012. "The case for Brazil and other Latin American countries is positive both short and long term," says Victor Arakaki, the investment director of Brazil equities, HSBC Global Asset Management. "The average age of a Brazilian is 29, democracy and good governance is increasing and the economy is very diversified with a strong domestic consumer sector. It doesn't just rely on the sale of its vast raw materials for growth."

Inflation is only just above that in the UK, at 5.5 per cent, and economic growth of more than 3 per cent is predicted in the year ahead. And check this out: government debt in Brazil is just 37 per cent of the economy, about half the level of the UK.

"For me along with India, Brazil and Latin America is the most exciting emerging market. I include China and Russia in that assessment," says Ed Bland, the head of research at Duncan Lawrie Private Bank.

It's not just Brazil's burgeoning middle class that accounts for Mr Bland's optimism. "Investors have been spooked by political instability and high inflation. It's a nugget of an economy. It has an inexpensive stockmarket and precious little state intervention – unlike China and Russia. There are even substantial new oil reserves about to come on stream in the Santos basin," Mr Bland adds.

But not all is rosy. Inflation may be down from historic levels but it is still stubbornly high by international standards. More generally, Latin America still contains its fair share of basket case economies – Argentina for instance can't borrow on international markets after its disastrous sovereign debt default at the turn of the century and as a result has double digit price inflation.

There is also, according to Mark Livingston of Fidelity, a major difference between the case for the Brazilian economy and opportunities available for investors. "Brazil the stockmarket is different from Brazil the economy. When investing in the stockmarket you get quite a heavy exposure to the commodities sector. Therefore, an investment in Brazil is in effect an investment in growth in China, because its economy pulls in so many raw material exports from Latin America. The companies which trade in this go on to largely dominate the stockmarket," he says.

As a result, Mr Livingstone doesn't recommend going for a fund which merely tracks the main Latin American stock market indexes. "It's a stock-pickers market. A fund manager has to take advantage of the consumption and the rise of the middle class, while trying to insulate investors from the volatility of the commodities market."

No wonder, therefore, that even those who are quite positive about Brazil and the continent's prospects still advise private investors to tread carefully. "We have about 16 per cent in emerging markets – out of that total 10 per cent is in Latin America, not a significant investment," Mr Bland says. And for many approaching retirement and not in it for the long term, even this small percentage investment maybe a bit too risky.

"Single country funds and regional funds in this area can be very volatile. They are only for equity investors with higher risk tolerances," says Darius McDermott, the managing director of Chelsea Financial services. But if you're willing to take the risk, Mr McDermott favours Allianz RCM Brazil. "This a direct way of playing Brazil. Or there's Aberdeen Latin America which has 65 per cent in Brazil and the reminder spread across the region and Mexico. The M&G Global Emerging Markets fund is diversified emerging market fund that has 16.5 per cent in Brazil which is its single largest country weighting."

Adrian Lowcock, from independent financial advice firm Bestinvest says he prefers global emerging markets funds rather than those specific to Latin American.

"Managers of these global funds will be able to alter their exposure to Latin America to reflect opportunities that may arise. Latin America is dominated by Brazilian equities which itself is dominated by two companies – Vale and Petrobas. So while you might get Latin America exposure you could end up with basically a commodities focused fund," he says.

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