Glen Finegan, co-fund manager of First State’s Global Emerging Markets Leaders fund, said the following about Brazilian equities in a recent interview:

 

“Brazilian equities still have a way to fall before they can be considered an investment opportunity. Genuine investment targets in Brazil are few and far between because once state owned enterprises and companies with poor corporate governance were stripped out there were few left to choose from. As a high beta market, returns from Brazilian equities would have to be high to make up for the risk taken. We do not want to own state owned companies because they are run for the benefit of the nation rather than minority shareholders. When you strip those big state owned companies out and look more closely at private Brazil, there is a large number of companies that were privatized in the distant past when corporate governance was poor. As a minority shareholder in these companies, foreign investors are likely to hold different share types to the controlling group, often a family or a managerial unit with close ties. This means in takeover situations minority shareholders do not get the same benefits as the controlling group, something which Brazilian authorities have not done enough to address. One move that has been taken by the Brazilian stock exchange is to create the Novo Mercado, or New Market, which demands higher standards of the companies listed on it. If companies choose to list on that market they would have to have one class of share, so the companies listed more recently in Brazil have better corporate governance.”

Finegan admitted that from a top down perspective the Brazilian market could be called cheap right now. But from a bottom up, stock-picker’s view high quality companies still look expensive. One of the few Brazilian companies Finegan holds is Weg, an electric motors manufacturer that exports globally. He said that Weg’s exports have been hurt by the strength of the Brazilian real, it is a fundamentally strong company and will be a beneficiary when the currency weakens.

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