Managers take positive stance on Brazil/Mexico

Fund managers in Latin America are maintaining positive positions in Brazil and Mexico despite the current uncertainty in the two regions.

Mark Meiklejohn, investment manager at Britannic Asset Management, says the likelihood of the election of the left-wing politician Luiz Inacio Lula as president of Brazil is particularly worrying the market at present.

It is Lula's fourth attempt to become president and, while he has toned down his socialist views, the market still sees him as a left-wing unionist, according to Meiklejohn.

He says: 'If Lula wins, Brazil faces the risk of sovereign default as the perception is that he will try to restructure the country's debt. A lot of this debt is linked to local interest rates and inflation looks under threat. The only way to ease this is to raise interest rates.'

Given the increased political risk and the overall global macroeconomic environment, Meiklejohn says, foreign direct investment (FDI) flows have decreased substantially.

However, he adds, much of this risk has already been factored in to asset prices and the IMF has put forward a $30bn rescue package that will be used to sure up sovereign reserves and roll-over the short-term debt.

He says: 'Brazil is seen as having a fundamentally robust economy, as the underlying numbers look strong even though the real economy has slowed. The credibility of Brazil's currency and its government is demonstrated by the willingness of the international financial community to support it.

'Our outlook is that Brazil's assets and currency look oversold and, while there is a risk of further deterioration and a voluntary default, the risk is on the upside. We are confident Brazil is in a strong fiscal position and the support of the financial community shows there is too much at stake to let it slide.'

As a result, Meiklejohn says, while he is aware of the risks, he is cautiously confident on Brazil and overweight the country relative to the sector.

Shahreza Yusof, manager of Aberdeen Latin America, is also overweight Brazil and Mexico due to the fact he does not hold any Latin America smaller countries in his fund.

Yusof has 55% of his fund in Mexico. He feels the country offers stability and low interest rates compared to the rest of the region, which he sees as weak. While it is not immune to the financial crisis afflicting the rest of the region, it has been slightly less affected by it, he notes.

In Mexico, Yusof says, the housebuilding and consumer sectors have done well, such as Wal-Mart Mexico and Coca-Cola.

These companies have made positive returns in the past few weeks due to the resiliency of their businesses and the fact they are driven by domestic rather than external demand, he adds. Overall, the Mexican market is heavily dependent on external economic conditions.

Yusof says: 'Growth in Mexico has slowed down but it is not in as poor an economic state as Argentina or Brazil.'

Meiklejohn is also overweight Mexico and is cautiously optimistic about its prospects going forward as it is a quality play on the Latin American region.

He says it looks attractive on current valuations and the companies generally have quality balance sheets, cashflow and management.

Adam Lewis

Bull points

Brazil received a $30bn IMF rescue package.

Continues to receive outside support.

Mexico continues to be fairly stable.

Bear points

Concern overcoming election result.

FDI inflows to Brazil have slowed.

Growth in Mexico in slowing.

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