Brazil is poor value and investors should look to China for consistent returns, Newton IM’s head of emerging markets and Asian equities has said.
Speaking to Citywire Selector prior to the Brazilian stock market plunge led by investigations into President Michel Temer, Rob Marshall-Lee said existing underlying issues have still not been addressed, making it a risky bet for investors.
'While the recession and a number of corporate governance scandals led to some positive political change, the underlying issues have not yet been fully addressed.
'The consumer recession has led to balance sheet repair as consumers and companies pay down their debt, leading to weaker demand. This has led to lower corporate investment and job layoffs, visible in the surge of unemployment.'
On Thursday, Brazil's benchmark Bovespa stock index, closed 8.8% lower, it's biggest decline since the financial crisis of 2008.
Marshall-Lee currently has zero exposure to Brazil in the BNY Mellon Global Emerging Markets fund, but currently has 22.8% of the fund allocated to China, which he views as safer.
'Chinese growth is likely to be far less commodity intensive in the future, whereas Brazil lacks competitive export industries outside resources as a result of prolonged high tariff protection for domestic industries.
'This has left the country uncompetitive, with a currency that has been strong for many years, along with relatively unproductive workers and expensive capital.'
Not all rosy
Marshall-Lee said Brazil’s rebound in 2016 saw the market reduce its risk perception of Brazil, but said this does not mean the country is out of the water.
'The debt burden probably still needs to fall further, and this is not made easier by weak employment and the lack of fiscal room for manoeuvre. Therefore, while we believe the consumer environment may recover a little, the outlook is not rosy for Brazil.'
The BNY Mellon Global Emerging Markets fund returned 18.95% in US dollar terms, over the one year to the end of April 2017. This compares with a 19.58% rise by its Citywire-assigned benchmark, the MSCI EM TR USD, over the same time period.