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Brazilian government inaction a 'big disappointment', says BlackRock's Landers
With GDP growth expected to be no better than around 2% this year, it will 'wake people up to make the fiscal reforms needed', Landers says.
BlackRock Latin American investment trust manager Will Landers admits that the Brazilian economy is not recovering as quickly as he had hoped, and he says he's frustrated with the government's lack of fiscal intervention to boost it.
With Brazil making up more than 60% of the MSCI Latin American index, Landers has been increasing his exposure to consumer durables, which he thinks will have a quicker recovery than the wider economy.
But although he is still optimistic about Brazil's return to stronger growth over the next few years, he expects 2012 to be a weaker year than last for the country. He also thinks any kind of meaningful resolution in Europe will be the trigger for an upturn in the country's fortunes.
Ditching Brazilian financials
Since the start of the year to 9 July the trust, which is a pick of Citywire Selection, has endured a tough time, losing 2.1% compared with the MSCI EM Latin American return of 0.3%, and Landers has responded by reducing some of his Brazilian financials overweight, and adding to his holdings in Peruvian mining companies and Columbian domestic names.
'Early last year we thought 2012 would be better than 2011 but it may now be weaker as wages have gone up. Brazil is going through an adjustment and it is overborrowed. Even though this is a short term issue it has an impact on growth,' Landers said.
'A big disappointment has been the lack of major intervention from the government to lower taxes on white goods and labour taxes to help exporters. Their constant focus has been to keep the currency weak.'
Landers believes that with Brazil's GDP growth expected to be no better than around 2% this year, it will finally 'wake people up to make the fiscal reforms needed'.
Despite his concerns, Landers points out that the market looks comparatively and historically cheap, on nine times earnings, and over the past six months he has tilted the trust towards companies he thinks can continue to benefit from a weaker currency. He has also reduced his real estate and financials exposure on his view that government interference is hurting banks' profitability.
Banco Bradesco remains the £280 million trust's fourth largest position, and its rival Itau Unibanco is also a top-10 holding. Overall Landers believes despite the interference, Brazil's banks are better capitalised than many of their Western peers.
Oil firm OGX has been removed following disappointing production, and the proceeds have been recycled into smaller stocks in Peru and Colombia. The trust also remains at only half the index's 8% allocation to Chile on what Landers views as stretched valuations.
Going overweight on Mexico
While reducing Brazil slightly, Landers has gone from an underweight to a 1% overweight position in Mexico in the past few weeks. At the end of May the country made up almost 18% of the trust.
'We are adding to existing holdings and to small caps we think can benefit from fiscal reforms. We will have to see how successful the new government's political reforms are but if they do come through it will be very positive for markets.'
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