Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Brazil is the largest economy in Latin America1. It comprises 60% of the MSCI Latin America index,2 and has four of the region’s five largest companies. It is the highest weighting in the BlackRock Latin American Investment Trust3 (BRLA) and where we concentrate a significant share of our analytical resources and time. It is a source of many of the region’s richest opportunities.
However, while it is vital for the trust, in recent years, the Brazilian market has been overlooked and underappreciated by global investors. It has lost out to higher profile markets such as China, and more recently, India and is now a relatively small part of most emerging market benchmarks. It makes up just 5% of the MSCI Emerging Markets index, for example, which is dominated by global technology and communications companies such as TSMC, Samsung and Alibaba4.
However, this also brings opportunity. Where a stock market is overlooked, it often creates mispricing which skilled active managers can capitalize on. The MSCI Brazil Index trades at just over half the valuation of the wider MSCI Emerging Markets index5. To take advantage of this for the BlackRock Latin American Investment Trust, our analysts frequently travel to Brazil. Having boots on the ground, allows us to evaluate a range of opportunities, finding companies where the prospects for growth may have been underappreciated by the market.
There are several reasons why Brazil deserves more attention from global investors. One of them being the advantageous geopolitical position of Brazil. With well-established diplomatic ties to both Eastern and Western nations, where the US and China is now Brazil’s two largest trading partners, the country stands out as a reliable trade ally6. Particularly important is the trade of its critical commodities. Its ability to trade freely with each side is likely to improve its economic position in the next few years, we believe.
Interest rates in Brazil are heading in the right direction
Brazil is also in a sweet spot when it comes to interest rates, as a result of the Central Bank’s swift reaction to the increase in inflation we were seeing in the aftermath of the Covid-19 pandemic. Brazil has operated with one of the highest real interest rates in the world for a period of time, resulting in inflationary pressures already subsiding, and leaving the Central Bank in a position to cut rates. We anticipate further reductions, particularly if the US Federal Reserve ceases its own rate hikes.
Lower rates would be good for the economy – it would allow for consumption demand to pick up and economic activity to get stronger. The OECD has already upgraded its economic growth forecasts from 1.2% to 1.9% in 20247 and there could be scope for further improvement. Cuts would also help flows into the stock market. With rates so high, international and domestic investors have tended to prefer the bond market, but this may reverse if interest rates fall and bond yields drop.
Why investing in Brazil presents opportunity
There are diverse opportunities in the Brazilian market. While the country might be best known for resources and energy companies such as Vale and Petrobras, it also has retail and healthcare companies with a strong pathway of growth. The opportunity set in Brazil is likely to diversify further in 2024, with more than 100 companies waiting to come to market8. These companies are coming from a range of different sectors, including infrastructure and technology. It is an exciting time to be looking at the Brazilian market.
Brazil is becoming an increasingly interesting markets and merits a closer look from investors. On BRLA, we believe Brazil is in a sweet spot for growth over the next few years, which provides a compelling backdrop for its companies and stock markets to thrive.
Source
1 Statista - Gross domestic product (GDP) in Latin America - May 2024
2 MSCI - MSCI Emerging Markets Latin America index - April 2024
3 BlackRock - BlackRock Latin American Investment Trust - April 2024
4 MSCI - MSCI Emerging Markets index - April 2024
5 MSCI - MSCI Brazil index - April 2024
6 Institute of Directors - Country trade profile – Brazil – April 2024
7 The Brazilian Report - OECD Improves Brazilian GDP Growth Forecast Once Again - May 2024
8 White & Case - Turning the tide: Global IPOs look for a rebound in 2024 - April 2024
Risk Warnings
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.
BlackRock Latin American Investment Trust specific risks
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk: The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets: Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
