São Paulo (2)

The final country on my South American itinerary sees me fly into Brazil, the continent's most populous nation by far; with 202 million inhabitants it's more than four times the size of the region's next biggest country, Colombia. The majority of my time I'm spending in São Paulo, which itself dwarves most of the other cities I've visited on this trip, or indeed elsewhere around the world. My taxi driver informs me, as we move at a snail's pace through the evening traffic in a city where extreme wealth sits uneasily beside extreme poverty, that it has grown from just 200,000 souls a century ago to 20 million today. That's more than double the size of London – and it feels it.

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At Tcam our focus is on delivering the right asset allocation for our investors, as this is the area where most returns are generated. It's therefore vital that we have a full understanding of what is steering markets around the world so that we can take advantage of inefficiencies and invest where we think particular asset classes are undervalued.

We have believed for some time that Latin American securities may be one such class – the market has overreacted in pulling money from the region, exaggerating the influence on the economy of falling oil and commodity prices, overemphasising political instability and under appreciating the region's ability to benefit from growth of the US economy.

This is the third and final in a series of blogs by Chief Investment Officer Haig Bathgate, as he tours South America to hone our investment thesis on the region, and find the drivers behind the main economies there.

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If Rio de Janeiro is the focus of Latin exuberance and festivals, São Paulo is the pulsating heart of the country's business and financial industry. In meetings with investors, all talk up the potential of a country that's hugely rich in commodities – it's the world's third-largest producer of iron ore, and is a key exporter of crude oil. It's also an agricultural powerhouse in terms of soybeans and sugar and is the world's largest producer of coffee. But nearly all those I meet also lament the country's inability to overcome some of the worst corruption to be found in South America. Accusations of graft have been made against key figures in the establishment, with the alleged involvement of a senior member of the ruling Workers Party in a scandal at oil giant Pretobras. The population is so incensed that hundreds of thousands of protesters took to the streets last month to demand the impeachment of President Dilma Rousseff.

This is all the more depressing because of the economic progress the country has made in recent years. Its gross domestic product has grown six fold over the past two decades to $2.3 trillion making it the seventh biggest economy in the world. It has a hugely impressive finance minister, Joaquim Levy, whose position in the government I'm reliably told is the guarantor of the country's investment-grade credit rating. He has taken many steps to reform the economy, in particular at the moment trying to liberalise the country's electricity market.

Still, there is a tightrope for the government to walk. One of the reasons for the need for reform is that Brazil, just like the UK, failed to use the good times to prepare for bad times that might follow. The influx of money into the country during the commodities boom up to 2010 was used to finance state-funded largess. Now that this source of income has diminished, the country is left with a deficit that can either be overcome by increased economic activity or austerity. Given the very left-wing nature of politics in the country, it's likely that politicians, even reform-minded ones like Mr Levy, will opt for policies that will stimulate growth and help rebalance government finances, rather than cuts.

The good news for Brazil is that any recovery in commodity prices will help boost economic growth quickly. This potential is tempered by an overvalued stock market and fairly valued bond market. However, all of this is immaterial if the country cannot get to grips with its Achilles' heel of corruption, something that most people in the country I've spoken to don't see disappearing any time soon. The high valuations means investors are unlikely to be appropriately rewarded for the risk of buying into a country that's rife with bribery and extortion; as a result it should not be a key destination for investors at present.

This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.



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