Brazil has taken a battering. Hurt by negative sentiment over political turmoil and weak oil prices, the country has had a torrid few years. But emerging market specialist Carlos Hardenberg of Franklin Templeton does not believe this is the end for the Latin nation. He thinks Brazil will generate sustainable returns over the long term, and that there are plenty of opportunities to choose from other than oil related stocks.
Hardenberg, manager of the Templeton Emerging Market Investment Trust (TEMIT) said while the recent crisis in Brazil had hurt the country substantially, the pessimism was also a driver to allow the government to push through necessary reforms, which had not done in the past “because everything went so well for a long time”.
“They have to stay competitive; they have to make sure entrepreneurs stay in the country; therefore they have to introduce necessary reforms,” says Hardenberg.
One large advantages in Brazil is it has three million engineers and entrepreneurs of European-descent who are very innovative, according to Hardenberg. And unlike other emerging markets, he praises Brazil’s independent legal system that functions well and an independent press, helping to monitor the government policy effectively.
“In Brazil they have developed a competitive airline. They also do a lot of technology in automobile and they are constantly making their industry competitive,” says Hardenberg, “Another blessing is that they do have natural resources. They have kind of the best things from both worlds.”
Opportunities: Mid-caps and Technology
Moving away from large blue-chip emerging market companies, Hardenberg and his team are upping exposure to mid-cap companies and companies that are able to develop sustainable technology advantages. Alternative sources of technology and cars is a sector he sees potential for growth in the future – and prices are coming down as there is more competitive, making it more attractive to invest in.
“We found a company in Brazil that is developing filter system particularly for automobile sector. Thanks to contagion from the VW emissions scandal they become competitively cheap. They are doing very well at the moment,” Hardenberg says. He also invests in a company in similar sector Korea that enables battery-driven cars to have a balanced cooling system.
Another area that Hardenberg likes is e-commerce, saying: “We are investing in a company which is the largest in Latin America and they have various business models. eBay (EBAY) in fact took a 90% stake.”
Tony Cousins, chief executive and chief investment officer at Pyrford holds a different view, saying Asia excluding-Japan is the opportunity in emerging market. He particularly likes Malaysia and Taiwan as they have current account surplus and factories construction keep expanding.
2015 – A Year of Underperformance
Hardenberg admitted the trust underperformed last year thanks to a failure to exit the commodities selloff on time, losing investors 23% in 2015. Long term things look better however; the trust has a 6.3% 10 years annualised return while it has generated 9.9% year to date. The trust is trading at a discount of 13.1%.
