Tempus: More than one way to crack Brazil

With the offer for Anthony Bolton’s Fidelity China fund only a week away from closing, it’s easy to forget that there are other high-growth emerging markets which private investors can play. Take Brazil, whose stock market has produced a consistent record of outperformance — returning 19.9 per cent a year in sterling terms over the past decade, against 10.1 per cent for emerging markets as a whole, and just 0.2 per cent for the MSCI World index, the most closely-tracked benchmark for global equities.

But although Latin America’s most populous country ranks first in the Bric acronym — Goldman Sachs’s designation, also encompassing Russia, India and China, for the nations it expects to sit among the world’s wealthiest by the middle of this century — it is usually the last in which UK shareholders invest.

For a start, it is not the easiest territory to which to gain exposure. There are a clutch of sizeable UK companies with extensive interests in Brazil — miners such as Anglo American; BG Group, the oil and gas explorer; Rexam, the drinks can maker; and Wellstream, which supplies pipes for subsea oil wells — but none are a satisfactory means of capturing the company’s domestic growth. That is significant given that more than 60 per cent of Brazil’s GDP consumption comes from inside the country — nearly twice that of China, for example.

That means the most direct route for private investors has been to buy iShares MSCI Brazil, a US-listed exchange-traded fund. The difficulty is that it tracks Brazil’s stock market index, whose fortunes are tied to a clutch of export-driven behemoths. Just two companies — Petrobras, the oil group, and Vale, the miner — account for two-fifths of its value.

The alternative is to back BlackRock Latin American, the only London-listed investment trust focused on the region. The company, launched 20 years ago, has been a strong performer, returning 245 per cent over the past five years, and 118 per cent over the past year alone — comfortably ahead of the 92 per cent delivered by its regional benchmark. However, although the majority of its £340 million assets are tied up in Brazil — about 71 per cent currently — BlackRock also has substantial interests in Mexico, Chile and Peru. That is likely to lessen its attraction to Bric purists, especially given that, through oil and automotive production, much of the Mexican economy is tied to the United States.

Which is why JP Morgan Brazil Investment Trust may be of more interest. This closed-end fund is the first London-listed vehicle to focus solely on Brazil, and follows on from Brazil Alpha Plus, the open-ended JP Morgan vehicle that has ranked in the top quarter of its peer group over the past two years. It also comes from the same stable that, over the past 17 years, has launched dedicated funds invested in China, India and Russia.

The case is straightforward. At the broadest level, the Brazilian economy has been transformed over the past few years. The boom-and-bust and hyperinflation of previous decades has been replaced by steady growth. The country was one of the last major economies into recession, but one of the first out, with GDP growth forecast at 6 per cent in 2010. Interest rates have fallen to 8.75 per cent — the first time in decades that Brazil has had single-digit nominal interest rates — and since 2008 the country’s bonds have secured an investment- grade rating. The discovery of estimated oil reserves of between 70 and 100 billion barrels, much of it in the deepwater Santos basin, also promises to make Brazil the world’s fifth biggest oil territory — behind only Saudi Arabia, Iran, Iraq and Kuwait. Petrobras plans to spend $174 million on capital expenditure over the next five years alone. The 2014 World Cup and 2016 Olympic Games in Rio de Janeiro should provide a further fillip to GDP — all the more so that given that Brazil’s capital investment as a percentage of GDP, at less than 20 per cent, has recently trailed its emerging market peers. About $50 billion is expected to be spent on infrastructure, mostly roads, railways and ports, before 2014. Further, Brazil’s consumer debt remains among the lowest in the world, providing scope for a big l expansion in financial services — particularly its banks, such as Bradesco and Itau. For example, mortgages currently account for about 2 per cent of Brazil’s GDP, but that is likely to rise to 10 per cent over the next five years given growing affluence and low interest rates.

The specific attraction of JP Morgan Brazil is its ability to pick from among 200 high-growth mid and small-cap companies that are poorly represented in stock market indices. These range from Totvs, a developer of accounting software for smaller businesses to Lojas Renner, the department store operator spun out from America’s JC Penney. The fund plans to hold between 25 and 50 stocks in all, including companies undergoing restructuring, and, in some cases, private equity.

There are near-term challenges. Brazil holds elections in October, when President Lula da Silva will have to step down having already served two terms. There are also signs of stock market indigestion. OSX Brasil, the shipbuilder, was forced to cut the price of its IPO, but still fell 12 per cent in first-day dealings. But on most measures the Brazilian stock market is not stretched — trading at 14 times 2010 forecasts, the same as Mexico, and cheaper than China, India or the US, but expected to deliver 33 per cent earnings growth this year. That suggests that, for more adventurous investors seeking an escape from a sluggish UK economy, JP Morgan Brazil is worth backing. Participants in the £50 million float, priced at 100p, have the added incentive of receiving one bonus share for every five for which they subscribe. The offer closes on April 9; trading begins on April 26.