South America’s powerhouse spreads faith in growth

Recent economic data on South America may have spooked investors easily distracted by the short-term noise disrupting an otherwise promising regional investment outlook.

While the region has seen a clutch of downward revisions to growth projections and a handful of inconsistent political decisions in recent months, investors should make no mistake about the potential for this South American capital destination.

Brazil, in particular,  has been a darling child of the new century as far as fund managers are concerned and the “Brazil is great” message has only recently been tempered with words of reassurance about some likely volatility over the short term.

Dhiren Shah, manager of the BlackRock Emerging Markets Income Fund, explains that, in the medium term, the fundamentals for Brazil remain strong and valuations look attractive following the recent sell-off.

He says: “So far, 2012 has been a disappointing year as economic growth has slowed and the associated operating environment for companies has been more challenging as revenue growth moderates while cost pressures continue.

Growth is supported by the steadily growing middle class further driven by decline in interest rates

“Within Latin America, economic growth is expected to be higher in some of the smaller countries, such as Peru and Colombia, but the number of investible stocks is limited. Growth is supported by the steadily growing middle class further driven by the structural decline in interest rates.”

Mr Shah’s view about the longer term prospects for the country is echoed by a great many, despite the short-term concerns relating to recent economic figures.

Pedro Miranda, chief executive of Itacaré Capital, says Brazil’s attractions are numerous and are the reason that investors should be mindful of the bigger picture.

“The population is highly concentrated within the economically active age range and unemployment is, therefore, low at around 5.7 per cent. This has led to a growing middle class,” he says.

“Inflation is under control, estimated to reach 5.3 per cent by the end of the year, compared with 6.3 per cent for the Latin America region as a whole and the Central Bank continues to decrease interest rates with further reductions projected by the end of 2012.”

Vivienne Taberer of Investec’s Emerging Markets Debt team likens the country to an adolescent child who is showing great promise, but as yet has not fulfilled their potential.

Ms Taberer says the battle against rampant inflation may have been won, leading rates on a steady downward trajectory, but more needs to be done.

She explains: “Brazil’s early successes and commodity riches have brought with them the problems of big increases in unit labour costs and an overvalued exchange rate that have impacted the production side of the economy.

“To take the next significant steps forward, in our view Brazil needs to raise its potential growth rate. To do this it needs massive investment, particularly in infrastructure. And, given its low levels of savings, a lot of that investment needs to come from international investors.

“While for now it is falling behind other regional markets in ensuring it is able to harness this potential fully, an adolescent Brazil certainly offers opportunities as an investment destination.”