Brazil's economic future is dependent not only on global economic stability but also on the abilit...
Brazil's economic future is dependent not only on global economic stability but also on the ability of its new president to implement economic reforms as soon as possible.
In the 12 months to 28 February, the Brazil Bovespa Stock Index returned -51.49% in US dollar terms against a return of -19.52% for the MSCI World Index.
Scott Crawshaw, emerging markets fund manager at Isis Asset Management, says the key issues affecting the Brazilian market are the uncertain global economic environment and the need for reform in such key areas as social security and taxation.
He notes that investment inflows to the region have been relatively healthy over the past two to three months but debts remain high and the country is dependent on the continued support of the US consumer for export demand.
He says: 'I expect about 2% to 2.5% growth in 2003 driven mainly by government and public spending. Brazil needs access to the global capital markets and therefore needs the global situation to improve.'
Jules Mort, Latin American equities fund manager for Threadneedle, is positive on Brazil for 2003, noting uncertainty over Workers' Party leader Luiz InÃ¡cio Lula da Silva, who won the presidency in October 2002, seems to have subsided.
He adds: 'Lula has come in with a few very well regarded spokesmen such as his finance minister Antonio Palocci. In February they increased primary budget surplus, the difference between income and expenditure, from the 3.75% of GDP set by the previous government to 4.25%. This means the government is spending less money than it is receiving before interest payments.
It is cutting back on its expenditure and as such Brazil is in a greater position to service its debt, giving it better credibility in the eyes of the global economic community.
'The government has proposed reforms on issues such as social security and taxation and Lula is currently presenting them to Congress.'
Crawshaw notes that with so much still dependent on the US, Brazil needs to get such reforms through to maintain access to foreign capital. He adds while Lula is popular now, he may not have enough support in the lower house of congress to enact his reform proposals.
Mort believes it would be difficult for Lula's opposition to rally opinion against him due to his current strong national support and the alliances he has formed with other political parties. He adds this could change after six to nine months, after which it may be even harder for Lula to pursue his own policies. Crawshaw says there is a mix of opportunity in Brazil for investors, noting steel companies are very strong due to their low production costs. He says iron ore exporters are also benefiting, chiefly because of demand from Chinese producers.
Mort says Brazilian banks are a good investment opportunity, citing ItaÃº as one of the most profitable banks in the world pointing out it pays a very high return on equity. Both Crawshaw and Mort agree the domestically owned fixed line telecommunications companies such as Tele Norte-Leste are good investments, especially since telecom prices and tariffs are set to rise in Brazil this year.
Economic growth expected in 2003.
Investment flows have been good in 2003.
Steel industry is performing well.
Need for reforms in social security and tax.
Dependent on US consumer.
Large amount debt.
To aid regulatory reporting
Three year strategic review
Impact on markets
Has run Cautious Managed fund since 2011
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