Banco do Brasil outlines key investor themes

Surging domestic demand from a rising middle-class and huge planned infrastructure spending will provide key opportunities for investors to tap Brazilian growth, a conference was told.

Speaking at the Brazil Investment Summit co-hosted by AsianInvestor and FinanceAsia in Hong Kong this week, Carlos José da Costa André, executive director of asset management for Banco do Brasil, outlined a compelling case.

He expects rising national affluence and a rapidly expanding middle-class to stimulate domestic demand, spurring growth in the homebuilding, retail and financial institutions segments.

Companies engaged in these areas will need to issue equity or debt to keep pace with demand, he notes, suggesting that durable goods manufacturers, large banks and insurance firms represent good investment targets.

The middle class accounted for 53.6% of the nation’s wealth in 2009, having risen from 43.2% in 2002. Over the same period the upper class saw its share rise to 15.6%, from 12%, while for the lower class it dropped by almost 15 percentage points to 30.8%.

Costa André also highlights the key infrastructure themes that will play out over coming years: oil production in Brazil’s pre-salt region; the government’s Growth Acceleration Programme (PAC); and the hosting of the football World Cup in 2014 and Olympic Games in 2016.

By 2020 the pre-salt region will account for 20% of total oil and gas production in Brazil. Capital expenditure for Petrobas, the state-owned oil company, is set at $224 billion from 2010 to 2014, of which nearly 70% will be spent on local suppliers.

Meanwhile total investment under the PAC programme to improve the country’s infrastructure is forecast at $564.1 billion from 2011 to 2014 and $371.5 billion thereafter. It covers areas such as logistics, transportation, energy and housing.

In association, the country’s sports ministry and Rio de Janeiro city has estimated infrastructure spending for the world cup and Olympics at $19.4 billion and $50 billion, respectively.

Accordingly Costa André suggests the key investment opportunities lie in sectors such as oil and gas, capital goods, logistics and transport, steel and mining, utilities and petrochemicals.

He notes that power generation and transmission companies in the utilities sector will look to sell debt products, while private equity investors should pay more attention to oil firms, airlines, rail-road and toll-road companies.

International appetite for investing in Brazil, and more generally Latin America, has surged since the onset of the 2008 global financial crisis in a renewed search for yield.

Recent activity in Asia saw Invesco launch a Latin America Sicav product in August for investors in Hong Kong, Macau and Singapore; ING Investment Management offer a Luxemburg domiciled Brazil Sicav in July, which will be available next year in Hong Kong and Singapore; and BNP Paribas Investment is looking to launch a ‘higher-alpha’ Brazil or LatAm product next year.

A number of products have also been launched in China over the past month, including: the China Southern FTSE Bric Index Equity Fund; the Citic Prudential Bric Active Allocation Equity Fund; and the China Merchant S&P Bric Index Equity Fund.

Banco de Brasil is eager to offer its advisory services to foreign investors and Costa André says it can help in areas such as small-cap stocks and active products (in preference to passive).

He cites examples of present mandates; it is advising Principal Asset Management for its Bric fund in Hong Kong, a Chilean investor in small-cap Brazilian stocks, and Ace Securities in its balanced fund in Japan.

Established in 1986, the asset management subsidiary of Banco do Brasil manages $209 billion in assets, counting for 21.22% of domestic market share. In Asia, the company has set up operations in Japan, Korea, China and Hong Kong.