By Fiona Manning
We see the World Cup adding little to the Brazilian economy over the long-term. The infrastructure spend on the tournament and the Olympic Games will only make up a fraction of the government’s overall infrastructure investment programme.
In the short-run, some companies will benefit from the legacy, yet the bigger challenge facing Brazil is slowing growth and stubbornly high inflation. An early World Cup exit for the home nation could add to the overall disillusionment facing the current government. President Rousseff’s government is already under pressure from the Brazilian people as public funds have been spent on hosting the games rather than invested in much needed housing, infrastructure and other social projects.
However, for us as stock pickers, the state of the economy is of secondary importance. The most important thing is that businesses continue to be well run, generating strong cash flows that can be returned to shareholders. From this perspective Brazil is home to some good quality companies that have the potential to perform well over the long term. Brazilian clothing retailer Lojas Renner, for example, has a country-wide footprint and is benefitting from greater formalisation in retail and driving consolidation in the market. Similarly Brazilian maritime services company, Wilson Sons, is exposed to the favourable outlook for the oil and gas activity in the country while benefitting from sector funding. It is a well-diversified infrastructure operator, operating in strategically located ports under long-term concessions and is expected to benefit from the government efforts to increase port investment.
Latin America benefits from encouraging demographics, young and growing populations, and continued urbanisation and industrialisation, which is driving the development of the middle classes. Economies could improve even more as concerns about tapering ease and rates start to come down since these should feed through to an increase in domestic demand. Looking ahead, a weaker Brazilian Government is potentially quite a good thing if it reduces Government interference in companies, and could also mean more pro-market policies.
In Mexico, the well-flagged suite of reforms that is being passed by the current Government looks very promising for the long term and is likely to attract significant foreign domestic investment into the energy sector in particular. Similarly, in Chile, we have seen tax reforms, which although have a mixed implications for companies, the simplification of the tax code and tax incentives for higher investments are positive. In addition to this, there are some long-term reforms developing in Chile, including the improvement to the provision of education within the country. In Peru, the government is committed to infrastructure investment and encouraging capital coming into the country and we may see the privatisation of Petroperú within the next year or so.
Fiona Manning is senior investment manager on the global emerging market equities team at Aberdeen Asset Management
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