Most of the action in emerging markets in 2007 has been in Latin America. It was the world’s best-performing region in the first half, notes Merrill Lynch, gaining 25% in dollar terms, and the most buoyant major market was Brazil, extending the bull run of the past few years with a 30% rise. The key driver over the past few weeks has been the prospect of Brazil being awarded an investment-grade credit rating within the next 12 months, as Handelsblatt points out. That would stimulate interest in Brazil from foreign institutional investors by making local assets appear less risky.
This also reflects Brazil’s greatly improved economic performance over the past few years. Not only has debt fallen, but memories of hyperinflation have receded as inflation has fallen below 10%; interest rates are down from 26% in 2003 to 12% today. GDP growth looks set to reach the government’s forecast of 4.4% this year, helped by exports (fuelled by the commodities boom) and, increasingly, local consumption.
Retail sales expanded at an annual rate of 11.5% in the year to March, the fastest rate in three years, while bank loans grew by 22% in the year to April. Luxury goods sales in 2007 will total $4.3bn this year, 48% up on a year ago, according to local research agency GfK Indicator.
Falling interest rates are also spurring mortgage lending; banks reckon there is scope for the mortgage market to expand fivefold in the next seven years, says Bloomberg.com. You can see why Luiz Ribiero of HSBC’s Luxembourg-based Brazil Equity Fund says “we are betting on consumption”.
Brazil also looks appealing on price – it is among the cheapest emerging markets, with a p/e of around 12, while Merrill Lynch expects profits to grow by 29% in dollar terms in 2007 – up sharply from its January 2007 estimate of 11%. Credit Suisse sees scope for the Bovespa to appreciate by another 15% in 2007. There is an ETF tracking the MSCI Brazil index listed in London (IBZL).