This article is part of our World Cup 2018 Investment Series, one top market pick from each of the eight Groups – but instead of comparing sporting prowess we outline the best investment prospect.
A 1-1 draw against Switzerland was an underwhelming start to Brazil’s World Cup campaign, a tournament the team needs to impress at to banish memories of 2014’s 7-1 semi final humiliation against Germany. Still, they are odds-on favourites to win what looks a weak Group E.
On the economic and political front, though, confidence is low. In 2016, Michel Temer took over from the impeached Dilma Rousseff as President. Now, the country is preparing to go back to the polls in October 2018.
And this is worrying markets, because support for many of the initial main candidates have wavered in recent opinion polls. Who will take the victory is a big question mark. Luiz Inacio Lula da Silva, leader of the left-wing Workers’ Party currently tops all polls. The problem is, he is two months into a 12-year jail sentence for corruption.
In polls excluding Lula, the far-right candidate Jair Bolsonaro comes out narrowly on top, with former environment minister Marina Silva, of the centre-left party Rede, coming in second.
As ever with elections, the uncertainty is worrying markets, leading to recent sell-offs in both the stock and currency markets. As a result, on the fixed income side, Jan Dehn, head of research at Ashmore, thinks “Brazil is moving into attractive territory”.
Pension Reform Inevitable
The country’s pension deficit is its biggest problem, and has been for some time. Clearly, with such diverse leading contenders, there’s a worry that other issues may be seen as a priority over this.
However, Dehn does not agree. “Regardless of who wins in October, they will do a pension reform because if they don’t they will have a debt crisis and if that happens they will not serve out their term,” he says.
“So I’m prepared to bet that a pension reform will be the first thing done after the election. In which case, the primary source of these worries will dissipate. When you then look at where prices are, bond valuations, etc; actually it looks like a pretty attractively priced country.”
In fact, until mid-May, the headline Brazilian stock market, the Bovespa, had been on a strong run, up 11% in the year to May 16. Since, it’s slumped 17.5% to a 10-month low.
How to Invest
Despite the Brazil Equity category having a number both open-ended funds and exchange traded funds in, none of them have a rating from Morningstar analysts.
On a more general note, the Vanguard FTSE Emerging Markets All Cap ETF (VEE), listed in Toronto, is a Bronze-Rated ETF with the highest equity exposure to Brazil, at 7.63%. However, with this fund you do have a higher exposure to Chinese stocks, which represent a third of the portfolio, warns analyst Daniel Sotiroff.
For those looking for less broad emerging markets exposure, a Latin America fund might fit the bill. Most of these are likely to have heavy weightings to Brazil. The Aberdeen Latin American Equity fund, rated Bronze by Morningstar analysts, for instance has 58% in the country.
The Aberdeen team, which has an expertise in emerging market investing, looks for quality companies at attractively valued prices, relative to both history and to similar firms.
