Even though Brazil’s broad economic growth has disappointed, leading to investor-pessimism, there are "still plenty of opportunities" to make money in the country, according to JP Morgan.
More reasonable asset valuations and a vast, diverse geography are some of the advantages that have been highlighted in a new report published by JP Morgan and its Brazilian asset management arm Gavea Investimentos.
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Robert Klein, president of the hedge fund business at JP Morgan Asset Management, said in an interview that the "sentiment pendulum has swung too far" and at 3.0%to 3.5% growth in Brazil "there are still interesting opportunities".
Reasons that disappoint
The Brazilian economy expanded just 0.9% in 2012, and an expected recovery is petering out in 2013, with forecasts pointing to around 2.5% growth. Inflation is 6.5%, and stocks, bonds, and currency have sold off sharply in recent weeks.
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By GlobalDataChina’s slowdown has weighed on the sentiment as well, according to JP Morgan AM, as it is a major consumer of Brazilian commodities.
However, Brazil and the broader Latin American region are "not likely to see a repeat of the China-led commodities boom that previously provided a favourable environment for growth, reserve accumulation, debt reduction and disinflation", the new JP Morgan AM report states.
Positive note
JP Morgan is "quite positive" on Brazilian consumers who have benefited from high employment and rising salaries.
Chris Meyn, a partner at Brazil’s Gavea Investimentos, said, "You are seeing wealth-creation. The consumer middle-class is robust; there is credit."
The other advantage that Brazil has, according to Meyn, is that wealth is not concentrated in the hands of a few families, as in much of Latin America.
Youth advantage
According to the new report, Brazil is in the first phase of the aging cycle of its population. Over the next seven years, this "growing, more productive workforce is likely to drive large increases in productivity, consumption, investment and demand for housing", the report states.
This phase represents a transition from an environment in which it was relatively easy to find assets, to a time when investors will have to be more selective, according to JP Morgan AM.
While Brazil’s equity market is among the most prominent for overseas investors, it remains dominated by a handful of large companies heavily focused on commodities and financial services. But JP Morgan said this highlights how the public market doesn’t accurately represent the breadth of opportunities available in Brazil.
Small and mid-sized firms find it expensive to raise capital, which, according to Gavea, is an opportunity for private equity investments. Although private-equity has been on a good run over the last seven years in Brazil, the report noted that it is still at a very early stage of development.
Brazil in focus
Earlier in June, in an unexpected move, Brazil cut its financial transactions tax on overseas investments in domestic bonds from 6% to zero.
BNP Paribas Investment Partners (BNPP IP) also said it is focusing on the new G7 emerging markets – including Brazil – which it believes holds the best long-term value for investors.
Globally, JP Morgan Asset Management has US$1.5 trillion in assets under management, and US$15.7 billion under management in Brazil alone. The Brazil figure includes Gavea, which alone manages US$7 billion in assets.
