With Brazil due to host the World Cup next year and the Olympics in 2016 this major emerging market will be very much in the public eye. However, for investors, Brazil is not just of interest over the next three years: this is a long-term investment story increasingly driven by domestic factors.
- Strong growth prospects
- Domestic economy exposure
- Reasonable charge
- Concentrated emerging market risk
- Short track record
"Many investors perceive Brazil as a China play, driven primarily by a demand for commodities," says Elizabeth Savage, research director at asset manager Rathbone. "This is a misconception, perpetuated by the construction of the Brazilian equity indices, which are dominated by Petrobras and Vale. Brazil is not as sensitive to global growth as many think, and exports are, at most, around 15 per cent of gross domestic product (GDP). With the world's fifth largest population and a median age of 29 years, Brazil enjoys favourable demographics.
"The Brazilian boom is domestically driven by the increasing prosperity of lower income groups. Reforms are being made, albeit slowly, to reduce the increased operational costs associated with doing business there. These factors create opportunities for well managed companies that can take advantage of growth in consumption and credit, and infrastructure investment. These companies should be able to grow faster than GDP in the long term, meaning the economy can achieve sustainable rather than break-neck headline growth.
"Lower interest rates on government savings accounts may incentivise investors to seek returns from equities while Brazilian equity valuations look reasonable, and growth is expected to pick up in 2013."
Read more on the investment case for Brazil
Most London listed Brazil exchange traded funds (ETFs) track the large-cap focused MSCI Brazil index, which has a heavy weighting to commodities. If you prefer a focus on the domestic growth story then options are thin on the ground but we think a good choice is JPMorgan Brazil Investment Trust (JPB). This trust targets small and mid-caps which exposes it to domestic growth. Its managers prefer domestic sectors with strong cash flow generation and earnings visibility over sectors such as commodities which dominate the major Brazilian stock market indices. By focusing on these smaller companies they also hope to avoid government interference in blue-chip companies.
| IC TIP RATING | |
|---|---|
| Tip Style: | GROWTH |
| Risk rating: | HIGH |
| Timescale: | LONG TERM |
The trust trades at a discount to net asset value (NAV) of around 3.5 per cent. This is tighter than its 12 month average discount of -5.22 per cent, but it could still benefit from a re-rating in both its share price and that of its holdings. The trust also has a reasonable ongoing charge of 1.58 per cent in view of the fact that it is a specialist single country fund - the other main active fund option available to UK investors, open-ended fund Allianz Brazil (GB00B52L0D85), charges in excess of 2 per cent.
JPMorgan Brazil Investment Trust does not have a long investment history having only launched in April 2010, but its share price has beaten its benchmark, MSCI Brazil 10/40 Index (£), over one year, and large-cap focused MSCI Brazil over the same period by quite a margin. It also has experienced managers.
Luis Carrillo is head of JPMorgan Asset Management's Latin America group and specialises in Mexico. He has worked at this company since 1998 before which he worked at consulting firms offering strategic and financial advice on Latin America and Asia.
Co-manager Sebastian Luparia specialises in Brazil and has worked at JPMorgan since 1996. Before joining the emerging markets equity team he was a senior analyst for the Latin American natural resources, cement and construction sectors, and global coordinator for the basic materials sector.
JPMorgan Brazil Investment Trust is relatively small with a market cap of only around £53m meaning it could be less liquid than larger trusts. Single country funds are higher risk as they are more concentrated, and emerging markets ones even more so as they entail risks such as political interference, poor corporate governance and inflation. A concentrated investment focus and emerging markets exposure can also result in higher volatility, while hosting events such as the World Cup and Olympics doesn't guarantee success. For these reasons advisers suggest that emerging markets single country funds should not account for more than 5 per cent of your portfolio.
But if you have a high-risk appetite, large portfolio and long-term investment horizon, this trust looks an attractive way into Brazil's domestic economy. Buy.
Also read our profile of JPMorgan Brazil Investment Trust
JPMORGAN BRAZIL INVESTMENT TRUST (JPB) | |||
| PRICE | 90.5p | GEARING | 96% |
| AIC SECTOR | Country Specialists: Latin America | NAV | 94.12p |
| FUND TYPE | Investment trust | PRICE DISCOUNT TO NAV | 3.63% |
| MARKET CAP | £53m | YIELD | 1.49% |
| SET UP DATE | 26- April 2010 | MORE DETAILS | http://am.jpmorgan.co.uk/ |
| ONGOING CHARGE | 1.58% | ||
Source: Morningstar
Performance
1-YEAR PRICE PERFORMANCE | 6-MTH PRICE PERFORMANCE | 3-MTH PRICE PERFORMANCE | |
| JPMorgan Brazil IT | -1.5 | 10.03 | 7.9 |
MSCI Brazil 10/40 Index (£) | -1.97 | 7.16 | 4.15 |
Source: Datastream as at 14 January 2013
TOP 10 HOLDINGS as at 30 November 2012
| Itau Unibanco Multiplo ADR | 6.7% |
| BRF Brasil Foods ADR | 5.7% |
| Companhia de Bebidas das Americas ADR | 4.9% |
| Banco Bradesco ADR | 4.8% |
| Valid Solucoes e Servicos de Seguranca | 4.8% |
| Raia Drogasil | 3.8% |
| Gerdau Preference | 3.8% |
| BM&F Bovespa Sa Bolsa de Valores | 3.6% |
| Ecorodovias Infraestrutura e Logistica | 3.3% |
| Localiza Rent a Car | 3.2% |
Sector Breakdown
| Financials | 26.5% |
| Industrials | 18.1% |
| Consumer staples | 15.6% |
| Consumer discretionary | 14.6% |
| Materials | 10.3% |
| Health Care | 4.2% |
| Energy | 3.2% |
| Utilities | 1.6% |
| Information technology | 0.6% |
| Cash | 5.3% |
