9th December 2014
Investors should consider selling Latin American funds and switching to India, Brewin Dolphin has urged.
Ben Gutteridge, head of fund research at the wealth management business said that positive changes are afoot in India that should benefit the country’s economy, while the Brazilian government was failing to make the reforms necessary to boost its competitiveness.
He said: “Emerging markets are a difficult equity space to shed light upon as it not an homogenous asset class, however, it is of our opinion that Latin American generalist funds and Brazilian funds are unappealing, and would much rather be bullish towards, for example, the Ocean Dial Gateway to India Fund.”
In a research note issued by the firm, Brewin Dolphin said its main concern for Latin America was the path of the Brazilian economy and stock market. It said it had correctly forecast that the nation would enter recession and it expects ” continued malaise and disappointing equity returns – certainly relative to India”.
A key factor is decreasing demand and over-supply in the commodities market, it warned.
Further problems include under-investment by the Brazilian government in the economy, which have rendered Brazil uncompetitive as a manufacturer and Brewin Dolphin argues that a meaningful devaluation of the Real is required as well as a host of other measures such as tax simplification and bureaucracy.
The note said: “As is the case with many emerging markets, aggregate valuations are dragged down by the large and inefficient State Owned (influenced) Enterprises such as Vale and Petrobras.
“The outlook for these companies is poor and their lowly valuations are well merited. Away from these companies and the financial sector, the index is not particularly cheap. Brazil, therefore, is a classic value trap.”
However, Brewin Dolphin said there were many reasons to be positive about India as an investment opportunity.
It said: “We have a positive outlook for the Indian market, given the ambitious reform programme the country is embarking on. It was not so long ago that India was lumped together with Brazil and others under the moniker the ‘fragile five’.
“The decisive election victory of Narendra Modi in May this year was an important turning point, but it is not only Modi that is working to revive the economy.
“Raghuram Rajan, the Central Bank Governor of the RBI, is a star that shines even brighter than our own. Together, and along with a considerable slice of luck in the form of lower commodity prices, they are tackling the main issues; inflation, current account and fiscal account.”