Fund managers that specialize in a single country usually find something positive to say about it, even if it is in the depths of a recession.
But not so for Brazil, the country where portfolio managers, like local politicians, businessmen and citizens, have been left scratching their heads about the nation’s economic and political future, NewsNow reported.
Brazil is not the only emerging market economy to have had a turbulent time this year, but the sheer scale of turmoil has been exceptional.
During 2015, the world’s seventh-largest economy slipped into recession, unemployment soared and Standard & Poor’s stripped Brazil of its investment-grade credit rating.
Its politicians and leading businessmen have been embroiled in a scandal surrounding state-backed Petrobras, the oil company and President Dilma Rousseff faces impeachment proceedings.
As the chaos has taken hold, fund managers have retreated from Brazil in droves. Although they see a small number of bright spots, such as exporters and parts of the fixed income market, portfolio managers also fear the impact of political and economic instability on returns.
Lionel Bernard, who manages the Equity Latin America and Equity Brazil funds at Amundi, Europe’s largest listed asset manager, says: “The strongest conviction I have at this point is that we will not have an [economic] improvement until we have a new political majority in Brazil.”
The performance of Bernard’s Brazil fund has fallen 36.7% in the first 11 months of the year, marginally underperforming its benchmark.
During the third quarter, Brazil—once regarded as one of the world’s growth engines—suffered its sharpest contraction in growth since a new gross domestic product calculation system was introduced in 1996, a fall of 4.5%.
Some commentators suggest its recession could turn into a depression. The country’s stock market has plunged more than a quarter over the past year.
“The economic and political backdrop [in Brazil] is continuing to deteriorate with no clear resolution in sight,” says Will Ballard, head of emerging markets at Aviva Investors, the UK asset manager.
Ballard, like several other fund managers invested in Brazil, including Invesco Perpetual and Amundi, has reduced his exposure to the country this year. Last year, 8% of Aviva Investors’ Emerging Market Equity Income fund was invested in Brazil; this has now dropped to 3.5%.
JPMorgan Asset Management has also decreased its allocation to Brazil by five percentage points this year, says Sophie Bosch, Latin America portfolio manager at the US fund house.
Bernard has also invested in companies focused on exporting, such as Suzano Papel e Celulose and Klabin, both paper producers.
He adds: “A lot of sectors, such as banking and utilities, have attractive valuations right now, but we need political stability and fiscal changes in order to feel comfortable with the domestic market.”
Investors believe political reform is needed for Brazil’s investment outlook to improve.
