Enjoy a Latin love affair in Sao Paulo
From PHILIP BOWRING in Sao Paulo
ARE Asian investors missing out or are they right not to place bets on volatile Latins when there are so many opportunities closer to home? Right or wrong, Asian investors are conspicuous by their absence from the Brazilian stockmarket at a time when other foreigners have been piling in.
Brazil may not be as big as China or its stockmarket as developed as some in Asia but its economy is bigger than ASEAN and its companies and financial institutions a generation or more ahead of those in China in terms of sophistication and predictability.
The BOVESPA (Bolsa de Valores de Sao Paulo) is up 100 per cent in US dollar terms this year. But that only brings it back to its level of early 1992. It is less than half its 1986 peak but three times its 1991 low.
In other words, it is even more volatile than the Taiwan market even excluding the fact that business is carried on in cruzeiros. These are depreciating at 35 per cent a month but the exchange rate is being maintained at a fixed rate against the dollar in real terms.
Surely then this is a place only for the foolhardy or for strong-nerved gamblers? Not necessarily.
The most remarkable fact about the market over the past year is the major role played by foreign institutions.
In 1992 a net US$1.7 billion (HK$13.2 billion) flowed into Brazilian stocks and probably a similar amount already this year. Total foreign portfolio investment is estimated at close to US$4 billion.
This is only some five per cent of total market capitalisation but the foreign players are much more active and represent 20 to 30 per cent of daily trade of around US$100 million on BOVESPA. There is an exchange in Rio de Janeiro but trading is only a quarter that of Sao Paulo.
The degree of foreign activity is indicated by the fact that in 1992 gross foreign portfolio investment was almost three times the net figure.
The foreign role is all the more surprising given individual foreign participation is barred. Only institutional investment is permitted.
The main reason is that the authorities are anxious not to allow offshore Brazilian money to enjoy the tax advantages given to foreign portfolio investors.
These include exemption from capital gains tax and withholding tax on dividends of only 15 per cent.
At present there are 45 foreign investment funds in Brazilian shares. In addition, various major pension life insurance funds have Brazilian portfolios organised under the foreign portfolio investment law.
It is not clear how effective a barrier the institutional framework is to expatriate Brazilian capital but it clearly acts as a disincentive to those who dislike either to manage their own portfolios or do not like paying the hefty front end and other fees collected by fund managers.
It also has the effect of concentrating BOVESPA trading in a narrow range of stocks. Though there are 554 companies listed, the top seven in trading terms account for some 65 per cent of turnover. They are Telebras, Vale do Rio Doce (iron ore mining), Eletrobras (electric power), Petrobras (oil), Usiminas (steel), Banco do Brasil and Paranapanema (tin mining).
Institutional desire for liquid stocks helps perpetuate the dominance of a few. But local analysts say many of the best buys are in less liquid medium-size companies with low P/E ratios but strong profits. There is also a strong industrial bias among themedium-sized companies and an almost total dearth of the Asian favourites, property and hotel stocks. There are also plenty of banking stocks to choose from.
Apart from the fund route, there is nothing to prevent foreigners from changing their dollars into cruzeiros and buying directly into individual Brazilian stocks as though they were locals.
However, they would not enjoy the tax breaks, and there could be a risk of not being able to repatriate their money.
A curiosity of the leading shares is that all but two of the seven, Paranapanema and Usiminas, which was privatised in 1991, are state controlled.
This used to be a disincentive for investors, wise to the inefficiencies of the Brazilian state enterprises and their susceptibility to being forced to hold down prices for political purposes.
However, one reason for market buoyancy is expectation that Telebras, Electrobras and Vale Rio Doce and perhaps even Petrobras will be privatised soon.
Another reason for market buoyancy has been a reduction in real interest rates from almost 30 per cent a year ago to around 17 per cent today.
A major breakthrough on inflation would bring down real interest rates much further, and spark a major stock boom. However, political turmoil, never far away, could dash these hopes. At present the a market is balanced between hope and fear.
It is, however, also bolstered by a strong revival of profits after two years of retreat in the face of recession.
After falling last year, GNP growth is expected to be four per cent in 1993 and depending on the political climate could be sustained next year.
Brazil's external position is strong and can support a recovery in domestic demand.
The market is selling to 12 times last year's earnings per share but only nine times forecasts for 1993. So despite this year's rise it is still cheap by current international standards.
Despite the doubts, aficionados of emerging markets would be remiss not to have at least a toe in an economy which is almost the size of the rest of Latin America put together.