The reconfirmed Brazil’s President Dilma Rouseff will be more conciliatory and market-friendly in the first part of her new mandate.
That is the view of the Hermes Investment Management’s head of emerging markets Gary Greenberg.
The Citywire AA-rated manager, who runs the Hermes Global Emerging Markets fund, currently has a 2% underweight to Brazil and believes its economic backdrop is getting riskier.
‘Dilma will appoint a few market-friendly ministers in the new cabinet and try to deal with the huge Petrobras’ corruption scandal that happened earlier this year. She hasn’t won by a lot, therefore her moves are constrained,’ he said during a Hermes' roundtable event.
Greenberg identified the as one of the main risk for the economy. ‘Brazil benefitted from the commodity boom for ten years and didn’t structurally reform the system. Now the real has significant downside potential and might adjust soon.’
The EM veteran has still retained fewer holdings in the country, such as the bank Itaú Unibanco and the sugar and bio-ethanol business Cosan. ‘Itaú Unibanco is a well-run and reasonably valued bank. Cosan is a very solid business, with an interesting potential and trading at an attractive valuation.'
Is Russia an emerging market?
Greenberg thinks 2015 will be a good year for the majority of emerging markets. However, he identified some countries which are not achieving improved competitiveness and market-friendly policies.
‘Turkey, Russia, South Africa and Brazil are fragile economies which don’t provide much of a buffer. They haven’t embarked on the same direction that China, India, Indonesia, Thailand, Mexico and Egypt have undertaken,’ he said.
Russia in particular, he added, seems not to care about economic progress. ‘We need to ask ourselves if Russia is still an emerging market, which I define as a country converging in terms of institutional development and economic growth.’
Greenberg is slightly underweight the country and holds some tactical positions in 'good and undervalued companies'. He said: ‘We like the retailer Magnit and Sberbank, which has done well so far without being helped by the macro environment.'
The Egyptian surprise
Elsewhere, Greenberg is positive on Egypt, which represents a 3% overweight position in his fund. ‘Egypt is a delta story. Capital has returned to the country following the more stable political environment,’ he said.
Despite not respecting human rights, the new government has removed subsidies and boosted foreign investments, according to Greenberg.
He said he has Commercial International Bank Egypt among his top holdings as he said it is a transparent and profitable bank which will benefit from a better macro backdrop.
Over the past three years, the Hermes Global Emerging Markets fund returned 18.13%, which is 13 percentage points more than the MSCI EM TR index.