Emerging market equities have had a gruelling run in recent years, with the MSCI Emerging Markets Index delivering a total return of -8% in sterling terms over the five years to the end of March, compared to a 57% return from the MSCI World Index. But within the emerging markets world, Latin America has been a true investment disaster zone with the MSCI EM Latin America Index plunging 34% over this period. At the epicentre of this abysmal performance is Brazil, the largest economy in Latin America, which represents nearly 52% of the MSCI EM Latin American Index (followed by Mexico, which is 32% and Chile, 9%).
Today has seen an overwhelming vote by the Brazilian Senate to impeach Dilma Rousseff, Brazil’s left-wing President. Rousseff stands accused of creative accounting to hide a ballooning public deficit, but this is just the specific hook to hang her floundering presidency. Under her watch the Brazilian economy has certainly been an utter basket case, contracting 3.8% last year, and is in the midst of the worst recession it has faced in eighty years. Brazil has been mired in corruption scandals at a time when it should be basking in the spotlight of hosting the Olympics this summer. Alongside economic mismanagement, Brazil has also suffered from weak commodity prices in the face of slowing demand from China, as it is a major export of sugar, coffee, ethanol and iron ore.
The markets have responded with glee this year to the growing prospect of Rousseff being booted from office, with the MSCI Brazil Index surging 48% in total return terms to the end of April, as investors see this as a potential watershed moment. But it also represents part of a wider narrative of change for the region, following the ejection of Argentina’s controversial Cristina Kirchner from office last year against a backdrop of fraud allegations, to be replaced by the centre-right Mauricio Macri, and the election of centrist Enrique Nieto as President of Mexico in 2012 on a reformist mandate.
The prospect of renewed political reform and the emergence of pro-business governments across Latin America is positive from an investment perspective. Yet investors should nevertheless tread carefully and resist the temptation to throw caution to the wind and rush to invest in a specialist Latin American fund on the back of recent market euphoria. The prospects for Brazil may well be turning a corner but the country faces many headwinds after years of economic mismanagement.
There are a handful of specialist Brazil funds available, including the iShares MSCI Brazil UCITS ETF, for passive fans, and the tiny £24 million JP Morgan Brazil Investment Trust (9.9% discount to NAV). But the vast majority of investors should achieve their exposure through global emerging market funds or investment trusts, where a team can evaluate the overall balance of opportunities and risks across different regions. Amongst these, the JP Morgan Emerging Market IT (11.8% discount to NAV) has a relatively overweight position on the key Latin American equity markets with 11.4% in Brazil versus, an index weighting of 6.6%, and 5.7% in Mexico compared to a 4.5% index weight. The trusts most bullish position however is in India where it has a 23.3% position compared to an index weighting of just 8%. Templeton Emerging Markets IT also has a high Brazil weighting (11.8%) but relatively little exposure to Mexico and is more exposed to China (20.8%) than India (8.7%).