Corporate bonds seen as best way to play Brazil
Although most foreign investors tap the Brazilian growth story through direct investment or private equity, for those who prefer securities portfolio investments, the best opportunity is in corporate bonds, says Joachim Levy, chief strategist at Bradesco Asset Management (Bram).
Levy spoke earlier this week at AsianInvestor and FinanceAsia’s Brazil Investment Summit in Hong Kong. He has served at multinationals such as the IMF and the Inter-American Development Bank, at the Brazilian ministries of finance and of planning, and as finance secretary for Rio de Janeiro. He joined the asset management company this summer. Bram has $115 billion under management.
The past decade of stability has been good for growth, Levy notes. Brazil has kept inflation under control, maintained the value of the real, reduced its public debt and brought unemployment down to a lower equilibrium.
Stocks and private equity have thrived in such an environment, and plenty of growth opportunities remain. For example, recent oil finds off the province of Pre-Sal will mean new jobs and technology, and will give the economy a boost akin to the one enjoyed by the UK after it struck oil in the North Sea.
However, the country faces shortcomings in infrastructure. It has spent the past eight years spending on welfare as well as liberalising the economy, so there is a huge amount of spending that must now be done on things such as hydropower, ports, roads, rail and nuclear power.
The government expects to spend $350 billion in these areas over the next five years, but there will also be a role for private financing. The World Cup and the Olympic Games will require Brazil to get a lot of infrastructure built in a short period of time.
The bank is fortunate in that its banks are sound, and the country’s low debt means it can afford to borrow more for infrastructure spending. But its overall investment level won’t be enough, Levy says; foreign investors will be needed.
Traditionally securities investors went to Brazil’s offshore US dollar debt or to its stock market. Its stock exchange, Bovespa, is now the eighth biggest in the world with a market cap of $1.2 trillion.
Levy predicts that real-denominated corporate bonds will become a bigger market than Bovespa over the next few years. So far in 2010, companies have issued R$14.2 billion ($8.3 billion) worth of debt, and the outstanding market is $327 billion, buoyed by Brazil’s large pension sector and local asset management industry. Most of these are floating-rate notes, but there is now some fixed-interest issuance as well, and interest rates in Brazil are high.
The challenge is that the local market holds this debt to maturity, so there is little secondary market trading. The government is encouraging the establishment of market-makers in credit.
Levy notes that today about 20% of the government bond market is held by foreigners and he predicts the corporate market will follow suit.