DIY Investor Magazine
|
Oct 2017
37
This has allowed the central bank to cut interest rates to
8.25%. Rates are expected to fall to 7.5% by the end of
2017 – and possibly further thereafter. The implications
for equities are obvious. There’s a clear contrast with
the West, where interest rates can only really rise.
So Brazil’s circumstances should provide plenty of
investment opportunities.
Where might those opportunities lie? Growing consumer
appetites offer one interesting avenue. The divide
between rich and poor is still all too stark in Brazil. But
the material wealth of everyone has improved.
Take the favelas, for example. The houses in these
shantytowns used to be literally built of rubbish:
cardboard, scrap metal and scavenged lumber. Today,
favela houses are built of brick and have running
water. Another sign of progress is how widespread air
conditioning now is.
But there’s still plenty of room for further improvement.
Only around a quarter of households have flat-screen
TVs or microwaves. So there’s a lot of scope for people
to improve their lives through simple measures – and a
lot of energy and optimism about the future.
That’s why consumer companies like Ambev, which we
hold in our portfolio, see ample opportunities for growth.
Lots of Brazilian people are still drinking cachaça, the
local firewater. That gives beer companies like Ambev
plenty of space to expand.
Retail also offers opportunities. Interestingly,
e-commerce isn’t the game-changer that it is elsewhere.
Although Brazil now has broadband and adequate
distribution networks, it lacks the capacity to allow online
purchases to be returned easily. Also, for the poor,
e-commerce is not an option. In the lawlessness of the
favelas, leaving packages with neighbours is out of the
question. Shopping malls are doing well, however; in Rio
de Janeiro, they are seen as oases from urban unrest.
Meanwhile, manufacturing companies, which suffered
during the downturn, have cut costs to reflect realities.
As economic conditions improve, these companies are
in great shape to exploit improving circumstances, and
the weaker real means that exports are growing again.
Although commodity companies still dominate Brazil’s
equity market, it also offers lots of infrastructure
companies with big yields. These will become even
more attractive as interest rates fall.
Finally, the country is tackling the distortions caused by
state-owned giants like Petrobras, the company at the
centre of the ‘car wash’ scandal. It is restructuring to
reduce its debt burden and render itself less vulnerable
to the politically motivated fuel subsidies that caused
much of that debt. The Temer administration is also
moving to privatise the state-owned power company
Electrobras.
We see Brazil as an ‘ugly duckling’ market. It is currently
unloved, and its opportunities are overlooked. But when
the cycle turns – as it will – investors who have seized
those opportunities early will stand to benefit the most.
To find out more about our high conviction, global
contrarian approach visit
Please remember that past performance may not be repeated and
is not a guide for future performance. The value of shares and the
income from them can go down as well as up as a result of market
and currency fluctuations. You may not get back the amount you
invest.
The Scottish Investment Trust PLC has a long-term policy of
borrowing money to invest in equities in the expectation that this will
improve returns for shareholders. However, should markets fall these
borrowings would magnify any losses on these investments. This may
mean you get back nothing at all. Investment trusts are listed on the
London Stock Exchange and are not authorised or regulated by the
Financial Conduct Authority.
Please note that SIT Savings Ltd is not authorised to provide advice
to individual investors and nothing in this promotion should be
considered to be or relied upon as constituting investment advice.
If you are unsure about the suitability of an investment, you should
contact your financial advisor.
This promotion is issued and approved by SIT Savings Ltd,
registered in Scotland No: SC91859, registered office: 6 Albyn Place,
Edinburgh, EH2 4NL.
Authorised and regulated by the Financial Conduct Authority.
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