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Brazilian consumer boom isn’t comatose, says EM boutique star

Brazilian consumer boom isn’t comatose, says EM boutique star

The rise of the Brazilian consumer is not a forgotten trend and patient investors can still unlock opportunities in the market, according to Citywire AA-rated Matt Linsey.

Linsey made the comments despite reducing exposure to Brazil in his €188 million GAM Star North of South EM Equity fund.

In an investor update Linsey said he had reduced his Brazil exposure to 7.59%, which is an underweight compared with the MSCI EM Emerging Markets Index EUR's exposure of 8.2%.

Commenting on positioning, Linsey said: ‘We added further to positions in Taiwan, Korea and India, which benefit from low or declining interest rates, while reducing our exposure to Brazil.

‘The latter is facing a continued risk of the rising costs of capital, in particular with the pick-up in Brazilian inflation.’

Expanding on his views of the Brazilian market, Linsey, who is founder of boutique North of South Capital and runs the GAM fund on mandate, said he had not given up on the country as whole despite this reduction.

‘Despite justifiable bearishness on Brazilian market over the past few years, we believe some interesting opportunities have now been created for bottom-up value investors with a longer time horizon,’ he said.

‘In the emerging asset class, investors are enamoured with the domestic consumption story. This is particularly the case where the macro situation is viewed favourably.

‘In markets such as the Philippines and India, for example, investors do not think twice about paying well over 30x current year earnings for food retailers. Brazil was not any different in the past.’

Stock stories stand out

Linsey pointed to food and electronic retailer Pao de Acucar, known as CBD, which was formerly known as a ‘market darling’ and had traded at 25x earnings. However, enterprise value and market cap have declined significantly over the past five years.

‘While some of the stock’s de-rating can be explained by recent management changes and sluggish same store sales, this does seem to be an overreaction. CBD’s enterprise value is now only one third of its current year projected revenues.

‘We apply a cost of equity of 18.4% when valuing CBD. If we assume a three year earnings growth rate in Brazilian reals of a little over 9.8% we get an upside to fair value for the stock of approximately 18%.

‘This may not seem like much upside, but we are using conservative assumptions given the company’s historical growth and a fairly punishing cost of capital given the current macro situation in Brazil. If either were to improve even slightly for the better the upside would be significantly higher.’

Brazil is the fifth biggest country exposure in the fund. The largest is Korea, which makes up 17.8%, ahead of Taiwan (16.75%), China (16.4%) and India (8.8%).

The GAM Star North of South EM Equity fund returned 12.6% in US dollar terms over the three years to the end of January 2015. This is while its benchmark, the MSCI EM (Emerging Markets) TR USD, rose 2.8% over the same period.

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