As the dust settles following Brazil's re-election of president Dilma Rousseff, broker Oriel Securities highlights the investment trusts best placed to capitalise on opportunities in the country.
The re-election of Rousseff, leader of Brazil's Workers Party, on Monday 27 October caused a stir in domestic markets, as many investors expressed their disappointment that opposition candidate Aecio Neves was not elected to drive through structural reforms.
According to Oriel Securities, in the three months running-up to the election, Brazil's Bovespa index fell 14 per cent in sterling terms while taking a further 6 per cent hit on election day. However, the broker adds that in the 10 days since the election the index is up 2.5 per cent, suggesting that investors are taking a 'wait and see approach'.
'The outlook for Brazil, which accounts for 55 per cent of the MSCI Latin American index, divides investors. The bears argue that we are in for more of the same with Rousseff continuing her populist, interfering policies and failing to bring inflation or public debt under control.
'However, the bulls argue that the narrow margin of victory has been a warning to her Workers Party that they must pay more attention to the economy and the interests of the middle classes, should they wish to secure victory at the next general election,' says Oriel.
Following the election, the share price to net asset value (NAV) discounts of investment trusts with significant exposure to Brazil have widened, which Oriel suggests may present a buying opportunity for those feeling more bullish on the region.
BlackRock Latin America has 59 per cent of its portfolio invested in Brazil and is currently trading on an 11.3 per cent discount, somewhat wider than its 12-month average discount of 10.1 per cent.
Going into the election Oriel says that manager Will Landers geared the portfolio for a Neves win, going 4.3 per cent overweight on Brazilian stocks relative to the MSCI Latin American index.
However since then, the broker says Landers has trimmed this, moving more politically sensitive stocks such as Petrobras to a neutral position; the trust's 29 per cent exposure to Mexico is meanwhile supporting returns.
According to Oriel, over the last one and three years to 3 November the BlackRock trust has been the best performing of the Latin American trusts, delivering a NAV total return of -1.8 and -10 per cent respectively, while its 4.1 per cent yield makes it attractive for income seekers.
exposure to bonds
Aberdeen Latin American Income sports an even higher yield of 5.7 per cent, and actively seeks to deliver an above-average income to investors. However, to achieve this, Oriel says the team has 50 per cent of the trust's NAV invested in Latin American bonds, including at least 19 per cent in Brazilian sovereign debt.
Brazilian bonds were hit earlier in the year by a downgrade to Brazil's credit rating, and despite some currency hedging Oriel says it is likely that the Brazilian fixed-income investments will have been held back in recent months by the decline in the Brazilian real.
Oriel says the Aberdeen trust's performance has struggled of late, with its NAV return declining by 11.6 per cent over one year and 11.0 per cent over three years. With net leverage of 14.2 per cent and its 7.6 per cent discount currently narrower than the 12-month average, the trust does not offer obvious value.
The JPMorgan Brazil investment trust is the only closed-ended fund with a Brazil-focused strategy. According to Oriel, its NAV has declined by 16.1 per cent over the past year and by 23.1 per cent over the past three years, making it the poorest performer of the selection.
As at the end of September the trust was 12 per cent overweight industrial stocks and underweight material and energy stocks; Oriel explains that managers Luis Carrillo and Sophie Bosch see a challenging short-term macro outlook for Brazil due to all the fiscal adjustments required after the election.
However, with shares currently trading at a 10.6 per cent discount - significantly wider than their 8.3 per cent 12-month average - the trust may be a value opportunity for those particularly bullish on the long-term future of Brazil's economy.
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