Pedro Bastos, Regional Director, Latin America, HSBC Global Asset Management, tells us why he's confident about Brazil coming out trumps
19-Jun-2012 •Vivek Malik
The shrill of naysayers notwithstanding, Pedro Bastos is mighty confident that Brazil is world's dependable growth engine. He tells Vivek Malik why the country will come out trumps even in the current volatile economic environment.
Our magazine carried your interview exactly 12 months ago and a lot has changed in this one year. Brazilian economy is beginning to slow down now. Your views.
Despite the fact that 2011 was not a very good year, the government in Brazil is targeting 4.5 per cent growth for this year and 5.5 per cent for 2013, which is slightly higher than our expectations. The reason we are hopeful of recovery of growth is because of all the incentives that have been applied to the economy.
The interest rates are down from 11 per cent last year to 9 per cent now and are expected to go further down by 50 basis points. Also, there has been an increase in the minimum wages this year which will benefit 50 million employees and 20 million pensioners, which in turn, will further enhance the consumption and hence the growth. Also, there has been a major coordinated effort by the Central Bank of Brazil along with the government to reduce spread costs that the banks charge to customers. The investment bank of Brazil has reduced the lending charges for the small and medium enterprises along with an increase in the tenure. State banks too have followed suit and have reduced the interest rates they charge which is again being followed by the private sector. This has created a healthy environment for increased GDP growth. Initially, the growth rate was pegged at lower rates but due to these host of initiatives the growth target has been scaled up.
Last time round, you had confidently stated that Brazil not being an export-driven economy, the slowdown in China will not affect it. But that seems to be happening right now due to lack of demand in China.
First of all one has to stop generalising the commodity demand because oil continues to be strong and agricultural commodity soybean too is commanding high prices. Copper also continues to be very strong. I think we have to see it from commodity to commodity basis. Iron ore, though, has suffered and steel too is under pressure but all this is still manageable. The current economic climate may cool down the prices a bit but it is still far off from the situation we saw in 2008 when the commodities index fell by 50 per cent and there was a freezing of global trade lights. We don't think that will be the case in 2012. The worst we might have is a soft landing in China. I don not see any major impact on commodities this year.
The outside world perceives Brazil as an economy heavily dependent on commodities boom. What do you have to say about this?
As I said earlier, a lot of initiatives are being taken by the Central Bank with the help of the government to help the small and medium sized businesses. These businesses are not linked to the commodities sector. They produce industrial items catering to the local demand. Also, due to the currency depreciation we will have a better chance of competing at the global level. All this is an ongoing process. Also, there is a coordinated effort to support the new Brazilian multinationals. Companies that are significant on the global scale and are expanding to new geographies. One of the companies which is also in our fund is Marco Polo, one of the largest bus manufacturers in the world.
A lot of problems which Brazil faces are present in India too. So, how do you convince the Indian investor to put his money in Brazil when both the countries are battling the same set of problems? First of all, India is one of the most attractive markets in the world because of its consumption prowess and as far as Brazil is concerned it can also be a good complimentary. Our consumption is 60 per cent of the GDP, similar to India. We have a young population and most of them fall in the working age category. As far as commodities are concerned, we have a great capacity to produce additional food items and can act as a natural hedge for the Indian market. Additionally, there are new oil discoveries in Brazil. It will be a major exporter of oil by 2020 and India suffers whenever oil prices move up. Brazil on the other hand will benefit when oil prices go up and again that will be a natural hedge for the Indian investor. Last but not the least is the infrastructure development. A lot of money is being pumped into the sector to prepare roads, highways for faster movement of the goods. That will also bring down export costs. All these factors make Brazil an ideal case for investment.
How big is the inflation threat?
Inflation is the number one risk we have to watch out for. Brazilian Central Bank has set a target of 4.5 per cent; plus or minus two. The inflation is currently 5.4 per cent, still above the desired target. Our forecast is that it will remain at this level for the rest of the year but we will have to watch out what steps the Central Bank takes next year if it moves up. There is a possibility that interest rates might move up again if inflation becomes threatening.
Your fund also has around 35 per cent exposure to financials which is huge? Is it due to a specific reason?
The banks in Brazil are very well capitalised. We have capital ratios in excess of 16 per cent and our RoEs are above 20 per cent. As more people enter middle class they would buy banking products. On the short term of course we are slightly underweight on the banks because the pressure banks face and reduction in spread costs.
In the last financial year the underlying fund fell by 14 per cent while its benchmark fell by only 9 per cent. What was the reason behind its under performance?
Last year there was a lot of volatility in currency valuations. In September 2011 the currency was at 1.61 and now we are at 1.90. Depending upon what limit you look at there was a currency impact which was important. On the underlying currency basis though our under performance was very small. Other reason was that the domestic companies in our fund did not perform up to the mark due to the high interest rates. Also, the fear of inflation further put paid to all the growth expectations of domestic companies. However, the fund has performed better than the Indian equity markets in the said period and hence acts as a hedge to the Indian markets.
RoE: Return on Equity; GDP: Gross Domestic Growth