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EMD star ditches Petrobras to add Eastern European exposure

EMD star ditches Petrobras to add Eastern European exposure

Investec’s Victoria Harling has switched out of Brazilian energy giant Petrobras into Kazakh state oil company KMG to eradicate the impact of the scandal-hit firm from her fund.

Speaking to Citywire Global, Citywire AA-rated Harling said she opted reduce exposure to the firm in mid-December.

This coincided with allegations of a multi-billion dollar scandal involving dozens of politicians from the ruling coalition and saw large-scale resignations by senior staff at Petrobras. Harling made the move a few weeks after auditors refused to sign off on the Brazilian energy corporation’s accounts.

Currently, Harling has a 2% allocation in KMG to her $1 billion Investec Emerging Markets Corporate Debt fund, which she co-manages with Citywire A-rated Peter Eerdmans.

‘In the Petrobras story, we were taken by surprise by the decision of the auditors refusing to sign off the company’s accounts,’ she said.

‘The investigation is now looking into 30 individuals in the government, and we don't know if it will stop with Petrobras or go further to look into other infrastructure contracts.’

‘There has been news about the investigation which extends into the banks and the favourable financing provided to some of the corporates involved in giving money to political parties.’

For all these reasons, Harling said, before investing further in the country, the first step is to get the official auditing results from Petrobras in April and understand the situation better.

Away from Russia: the KMG bet

Amid widespread turbulence in emerging markets seen in December, the Citywire AA-rated manager decided to invest in KMG to capitalise on its cheap valuations.

‘We exited all Russia and Ukraine by April of last year. In December, we debated whether it was the right strategy to go back there because assets looked very cheap. We finally decided that KMG was a better option,’ she said.

KMG offers a better risk-return profile than some of its Russian counterparts, Harling said. ‘The company had underperformed dramatically as it was trading with Russia. Valuation was unfairly beaten up even though fundamentals should have been reflected in a much higher price.’ 

Bringing down Brazil bets

Harling is still a strong believer in Brazilian corporates, but thinks the asset class presents a strong headline risk. In the past six months she has trimmed her overweight position by more than three percentage points, from 14% to less than 11% of the portfolio.

‘We've had reasonably long-standing overweight in Brazil, which hit our performance on the back of the Petrobras investigation. On the other hand, corporates in the country are outstandingly cheap,’ she said.

In the country, she favours strong industrial names which are not related to Petrobras, such as the bio-ethanol and sugar producer Cosan.

She also likes the petrochemical company Braskem, which she admits to be ‘kind of related’ to Petrobras.‘The company’s bonds were very cheap, and are now coming back to more fair value. Braskem has been buying all its nafta and fuel from Petrobras, which has a stake in it as well,’ she said.

‘Nevertheless, the partnership is not related to the corruption allegations with regards to the construction businesses.’

Over the past three years to February 2015, the Investec EM Corporate Debt fund returned 13.76% in USD terms. This is while its Citywire benchmark, the BofA Merrill Lynch EM Corporate Plus index, rose 13.01%.

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