You are here: cherry > Press releases for November 2010 > Carlos de Leon, co-manager of Allianz RCM Brazil fund, comments on the Brazilian Presidential election

02 November 2010

Carlos de Leon, co-manager of the Allianz RCM Brazil Fund, comments: “Dilma Rousseff’s victory signals broad continuity with the policies that have been in place for most of the past decade. When officially taking office on 1 January 2011, she will aim to push forward new structural reforms. New measures will focus on student loan programmes to reduce drop-out rates; new infrastructure development projects opening the door to private sector participation; further development of existing housing programmes for the low-income population; new hydrocarbon auctions via oil and gas rounds for off and onshore acreage; a modest-sized tax reform and a review of the regulatory framework for the mining sector. Many of these measures link up with investment themes that are attractive from our perspective and would benefit companies operating in these sectors. Desire for fiscal austerity “The market expects little change from the current macroeconomic policy, although there is hope that the new administration will promote more fiscal austerity in the early stages of its mandate. The days and weeks after the election will shed new light on who will become Cabinet members in the new administration. There is a growing expectation that former Finance Minister Palocci may take a central role in economic policy in the new government, thus adding credibility and visibility early on. New senior management appointments at large, government-owned corporations will also be important in this respect, although this selection process is more likely to take months rather than weeks. Infrastructure projects need urgent attention “Infrastructure projects along with the associated fixed asset investment will have to be stepped up. This will be driven by continued government investment in tandem with the private sector. Historically, infrastructure spending has mostly been small and uneven, which has exacerbated the infrastructure deficit. Brazil has some of the world's weakest port and transport infrastructure, despite being one of the world's leading commodity exporters, and this has led to serious transport and access bottlenecks that have held back productivity and efficiency gains. This needs to be addressed, not least in view of the World Cup in 2014 and the Olympics in 2016. “Infrastructure development is positive for stocks that are exposed to the production of trucks, railcars, buses and operators of logistics businesses, port infrastructure as well as those building and operating toll roads and other means of transportation. Securing long-term financing has at times been tricky for select projects, but recent history shows this can be overcome via a combination of private and public funding, especially from the BNDES, Brazil’s active national development bank. Oil and gas sector offers a myriad of investment opportunities “Despite the focus on infrastructure and domestic demand, Brazil recognises it needs energy to sustain its pace of growth. Positively, Brazil is a global ‘hot-spot’ for the oil and gas industry with a rich geology, the existence of ‘giant’ fields, internationally competitive fiscal terms and a stable regulatory environment. Bringing on stream recent discoveries in the prolific offshore Campos and Santos basins is a national priority and could convert Brazil into a major global oil production powerhouse in the medium-term. Petrobras has come a long way since oil was first discovered in the Campos basin in the 1970s. It has since become one of the largest listed integrated oil majors globally measured by market value, owning a huge resource base of quality assets and energy sector dominance along the value chain. A recent string of new listings, however, is providing fresh investment alternatives via purer plays on the exploration and production side of the business, which allows focusing on the higher value-generating upstream sector. Brazil’s Oil & Gas Agency is expected to launch new licensing rounds going forward, providing new opportunities for domestic and international oil companies to acquire high-potential acreage. The investment case for Brazil continues to evolve “Brazil remains an attractive investment proposition, with attractive risk-reward credentials. Growth is under-pinned by strong domestic demand, growing credit availability and a large commodity resource base, and will continue to benefit from enhanced political stability. The strong and dynamic economy, that allowed the country to emerge from the global financial crisis quickly, together with a large and liquid equity market offers investors access to fast-growing sectors. The investment story in Brazil continues to evolve, with consumer demand, formalisation, infrastructure, education, housing, private healthcare, energy, mining and agriculture representing high-potential investment themes. “The elections underline that Brazil has further matured as a nation and the firmly established direction of policy promises more of the same. The macro environment makes Brazil one of the world’s most attractive investment destinations at this time. The pillars of economic stability – inflation targeting, floating FX, fiscal discipline – remain in place. The growth outlook remains deep-rooted, with the economy expected to grow by 7% in 2010 and by 4.5% in 2011. We have witnessed profound change in the economy in recent years and expect to see more of its potential being unlocked going forward. The equity market is forecasting earnings per share growth of 20-25% for 2011, which is supportive of Brazilian equities, especially now that the two main obstacles weighing on the market (the Presidential elections and Petrobras’ capitalisation) are out of the way. Reassuringly for the equity market, this growth is not expensive, with the Bovespa trading on estimated 10.7x next year’s earnings. Headwinds remain and government efforts in dealing with a strengthening currency, fiscal discipline and the extent of public lending are aspects the market will be watching closely.” - Ends -

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