Fund managers are seeking Brazilian market exposure

ARE CIVITS the new BRICs? The emerging market acronym – BRICs – standing for Brazil, Russia, India and China has been cast aside for CIVITS, the latest buzzword for China, India, Vietnam, Indonesia, Turkey and South Africa. But rather than get excited by the new entries, some fund managers are chasing after the developing middle class markets of those countries that CIVITS leaves out. Witness Allianz Global Investors and the new Brazil Fund it is launching in three weeks.

The new Brazil Fund claims to be the first ever UK-authorised, actively managed Brazil Open Ended Investment Company. It is looking to capitalise on what mid- and small- sized companies have to offer. Previous Brazilian investments have been pinned to the MSCI Brazil Index, which is heavily biased towards large-cap material and energy stocks. This results in large caps such as Petrobras and Vale taking up almost 50 per cent of the index. Allianz says using this index limits exposure to the emerging middle class markets that the changing demographic of Brazil promises.

Rising employment, wages and aspirations have produced a buoyant Brazilian middle class ripe for investment. Will Landers, a fund manager for BlackRock Latin America Fund, says: “There is huge pent up demand from this burgeoning middle class. Approximately 30 million people are now more economically active and not only seeking credit and housing but also becoming less restrictive with their spending habits.”

Brazil has made impressive progress. Significant restructuring of public finances and monetary policy has led to investment grade status, lower inflation rates and much lower interest rates. This has shielded Brazil from much of the pain of austerity measures being experienced elsewhere. Michael Konstantinov, manager of Allianz’s RCM Brazil Fund says that a wider Latin American fund was not pursued partly because they were concerned about exposing themselves to Mexico, which is heavily dependent on the US?economy.

Domestic demand is up in Brazil. Purchasing power has risen 35 per cent since 2003. BlackRock predict that the low rate environment will give birth to rapid growth in financial services such as 10 per cent growth in the mortgage market over the next five years. This is likely to have a positive impact on the banks, homebuilders and companies associated with these industries.

Allianz’s Konstantinov says that the political risks are far lower than people might think: “We already have the most left-wing government in place, which was previously unthinkable in Brazil, and it has actually done quite a good job. So if the Presidential candidate of the current President Lula is going to win, we pretty much have the status quo; if the candidate from the conservative party is going to win, we might actually see an acceleration in economic reform which will be even more positive.”

So investment in Brazil could soon be better targeted, reap bigger rewards and provide better insulation against downturns elsewhere.