Despite suffering from a fraction of the liquidity, debt and rating issues currently crippling developed markets, Latin American equities have been among the weakest performers over the last year.
The Brazilian Bovespa is currently trading between a 56900 and 57000 range, which is much closer to its 52-week low of 48668 than its 52-week high of 71632.
Meanwhile, the Mexico City Bolsa Index is trading in a range of 36100 to 36200, with its 52-week low at 31715 and its 52-week high at 38696.
To Will Landers, senior portfolio manager of the BlackRock Latin American Investment Trust, this indiscriminate sell off of equities provides a great investment opportunity, and he is using this time to position his fund for if and when the situation in Europe stabilises.
He expects Latin America to be a relative outperformer when this happens, as it was after the 2008 financial crisis, due to its "superior fundamentals".
The ‘Yes’ vote
As with most emerging markets, the "consumer story" in Latin America has been given much air time.
Landers said the demographics in Latin America of a young population growing in purchasing power had not changed over the past 10 years and were not going to change over the next decade either.
He added that fiscal and monetary reforms over the past decade had allowed various countries in the region to grow from a domestic rather than export-led perspective.
Within his fund Landers has a 20% overweight in Brazil, compared to his benchmark – the MSCI EMF Latin America index.
The country accounts for between 80% and 90% of his fund, which he said is due to it being the most liquid and deepest market in the region.
One might question why he doesn’t just go gung ho and run a Brazil fund, but maybe he likes to think he can take some of his eggs out and put them in another basket if the need arises.
Landers also likes the combination of the bottom up and top down stories in Brazil and thinks the Central Bank of Brazil is doing a much better job of managing monetary policy than historically.
Politically he says Brazil is also looking stable, with its new President Rousseff trying hard to stamp her mark as a paragon of anti-corruption.
Landers said she has been helped a lot by the fact her predecessor President Lula da Silva left with record high approval ratings, which he put down to "everyone in Brazil from the richest to the poorest doing better than they were 10 years ago" in terms of income.
What’s more, income distribution in Brazil is making much greater strides than other developing nations such as China where the gap between rich and poor is widening.
The ‘No’ vote
Glen Finegan, co fund-manger of First State’s Global Emerging Markets Leaders Fund, is less convinced about the potential for Brazilian equities, however.
At the start of October, when Portfolio Adviser interviewed him he said valuations still had a way to fall before they could be considered an investment opportunity.
In that time the Bovespa has tracked generally higher, so presumably he still views Brazilian companies as too expensive.
He also raised concerns about the limited number of "genuine investment targets" in the country once state owned enterprises and companies with poor corporate governance were stripped out.
So from a bottom up stock-picker’s view, Finegan said the remainder high quality companies still looked expensive. His fund has only 14% invested in Latin America, and within that only a fraction is in Brazil.
The new market
One step the Brazilian stock exchange has taken to try and allay some of the fears foreign investors have about corporate governance is to create the Novo Mercado, or new market.
This is a segment of the Bovespa index demands higher standards of the companies listed on it, such as a single class of share and more stringent levels of governance.
The Novo Mercado is not as new as is sometimes portrayed though: It launched in 2000 and only two firms listed on it in the first three years.
But in 2007 it listed its 100th company and growth has been steady since then. Novo Mercado’s advisory board is also looking at further reforms to try and make its standards in line with those of the EU.
With corporate governance firmly on the agenda, less dependence on exports (only 10% of Brazil’s GDP comes from exports) compared to other emerging markets, and two major sporting events to host in the next five years (World Cup 2014 and Olympics 2016), Brazil’s star is certainly on the rise.
What remains to be seen is whether its stock market will also benefit from these factors.
