Brazil stocks set to rise after Petrobras issue, says ING IM

Brazil remains the focus of investor interest in Latin America, as the region’s biggest exporter of commodities and by far the largest country component in the MSCI 10/40 Latin America index with a 65% weighting.

And once the huge pending equity offering by energy major Petrobras is complete, yet more money should pour in, says Eric Anderson, head of Latin American equities at ING Investment Management in New York, speaking to AsianInvestor during a visit to Hong Kong.

It’s no surprise, then, that his firm's latest Latin America funds centre on Brazil. For those who want a direct play on the country, rather than regionally focused or global emerging-market funds, ING IM launched a Brazil Sicav fund in July and a Brazil fund in Taiwan in April.

And other asset managers are making similar moves. Allianz RCM will launch a Brazil OEIC fund in October, and Invesco set up a Latin America fund in August.

The ING Brazil Fund based in Taiwan launched with around $150 million in AUM and was up 5.2% in Taiwan dollars as of September 20, outperforming the MSCI 10/40 Brazil benchmark by 348 basis points. This fund and the Luxembourg Brazil Sicav are generating significant interest from retail and institutional investors alike, says Anderson, but he declined to give details of the Sicav's returns or size.

“Brazil is obviously the largest market in Latin America and is the most exciting investment in terms of opportunity, depth and liquidity,” he adds.

It has clearly proved a popular investment destination and is no longer “dirt cheap”, notes Anderson, but a price-to-earnings valuation of roughly 10x means the market is still attractively valued.

And Anderson believes the completion of the Petrobras share offering – set to be the biggest in history, at $79 billion – could be a catalyst for better performance in the stock market, which is virtually flat in dollar terms on a year-to-date basis.

“[The pending offering has] been a tremendous overhang on the market,” he says. “Some investors have said ‘I don’t really want to touch Brazil until this deal gets done’.” But there's more certainty in the market now, since the deal will be priced and the new shares trading in the market by the end of this month.

To support his point that stocks are set to rise, Anderson cites another, smaller offering earlier this year that also weighed on the market. The $5 billion raised by state-owned Banco do Brasil created a drag on the financial sector, but once it was completed on July 1, the sector “took off”. Since then, the financial sector in Brazil has rallied 28%, compared to a 17% increase for the MSCI Brazil index.

While Anderson is bullish on Brazil and the region, he sounds a note of caution over valuations in Chile and Colombia, as well as the regional consumer staples sector, all of which have been "safe havens in volatile markets".

The Chilean stock market hit a year-high of 1,735.68 points on September 8; it has since dropped to 1,716.15 as of September 21, but remains up 24.8% year-to-date. Colombian shares were up 34.5% YTD as of September 21.

“Chile and Colombia have performed extremely well due to positive macro fundamentals and strong earnings growth,” he says, “but markets appear to be trading well ahead of fundamentals.”

Within the consumer staples sector, Anderson expects some underperformance as risk aversion recedes and investors start to rotate into higher-beta sectors, such as financials, consumer discretionary and materials.