Emerging-markets roundtable: Part 3

The big picture in Brazil

Sonita Horvitch 16 December, 2011 | 7:00PM
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Editor's note: Our coverage of Morningstar's roundtable on emerging markets concludes today with the portfolio managers assessing the outlook for Brazil, and discussing their overall portfolio strategies.

Our panelists:

 Patricia Perez-Coutts, senior vice-president and portfolio manager at AGF Investments Inc., and manager of the award-winning AGF Emerging Markets.

 Chuk Wong, vice-president and portfolio manager at Goodman & Co. Investment Counsel Ltd., which manages the Dynamic mutual funds. Wong is a global manager with extensive knowledge of emerging markets. Among his mandates is Dynamic Global Value.

Boston-based Chris Arbuthnot, senior managing director and senior portfolio manager at Manulife Asset Management Ltd. Arbuthnot is also a global manager with an expertise in emerging markets. Among his mandates is Manulife Global Opportunities.

The author of this week's three-part series, which began on Monday and continued on Wednesday, is Morningstar columnist Sonita Horvitch, who moderated the discussion.

Q: What about Brazil?

Wong: Long-term, the outlook is positive. Near-term, because of its exposure to the commodity cycle, Brazil is exposed to the China story. The country can produce 4% to 5% per annum GDP growth, but the rate of inflation will be 7%, though it is coming down. Its stock-market index is commodity-driven.

Arbuthnot: I would argue that [Brazil's] economy is less exposed to the global economy, though the Brazilian stock market is. Exports are only 11% of GDP. Brazil has a young and growing population. The consumer is not leveraged. There is no housing bubble and no banks are broken. It continues to attract a lot of foreign direct investment. It is number two behind China. Brazil is fiscally strong. It has this huge commodity base. It is one of the largest producers of iron ore globally. It has huge offshore oil resources that are currently being developed. It is strong on agricultural products, sugar, coffee, beef and chicken. The country is running at full employment.

At the end of October, I had 21% in Brazilian stocks in Manulife Global Opportunities, with energy company OGX Petroleo NM my biggest weighting in the fund.

Perez-Coutts: I like Brazil on a long-term basis. I have 14% of the portfolio in Brazil. My biggest holding in Brazil is Lojas Renner SA, which is also the largest holding in AGF Emerging Markets. It makes and sells clothing through a chain of stores. It is well managed. I have known the company for a long time. It has added a credit component, which is important. The stock has a dividend yield.

On the macro front, Brazilians are good at managing their economy and have mastered the ability to rein in inflation. A negative is that Brazil has a bloated labour force that it has to fund in retirement.

Q: Patricia, have you been finding opportunities in Brazil?

Perez-Coutts: Yes. Some stocks have come off.

Wong: If you dig deeply, you can find interesting names. We own two credit-card services companies, Cielo and Redecard.

Perez-Coutts: We own Redecard.

Wong: It is a consumption story. Credit-card penetration in Brazil is low.

Q: Time to talk more about your portfolios.

Arbuthnot: Manulife Global Opportunities, which has about 50 names, has 38% in emerging-markets stocks. We typically have between 25% and 40% in emerging markets. I currently have 10% in cash.

The major country exposures in emerging markets are Brazil and India. My style is value-oriented in the developed markets and a more growth-at-a-reasonable-price style in emerging markets. OGX is the largest holding in the portfolio. The company has high-quality, low-cost energy assets offshore Brazil. It has a phenomenal management team. OGX will start production in the next few weeks. There is a big production ramp-up.

In India, we have been adding to our holding in Reliance Capital, a fast-growing private sector financial-services company in the country. Reliance Capital has leading positions in insurance, commercial financing and asset management.

It recently sold off a stake in its life-insurance business to Japan's Nippon Life Insurance, which is surfacing value. It is in the process of selling off a stake in its asset-management business. It is the second largest asset manager in India. The Indian mutual-fund industry is in its first innings. The stock is cheap.

I also own Reliance Infrastructure, which is in power generation, regulated electricity distribution in Delhi and Mumbai, infrastructure projects. It is also the second largest engineering and construction company in India. The company will benefit from the infrastructure build-out. The stock is attractively valued and its earnings profile is robust.

Q: Chuk?

Wong: I have 42% in emerging markets in Dynamic Global Value, which has 56 names, with 5% being my cap in any one name. I have about 8% in cash. My weighting in China is at 17%. A year ago, my weighting was about 8%. As Chinese equities got cheaper, I bought more.

A major holding is Agricultural Bank of China, which I have held for a while. Another Chinese name that I like is AAC Technologies Holdings Inc., which is a leading manufacturer in the global micro-acoustics industry. AAC'S components are used in cell phones, smartphones and iPads.

It's an underappreciated company. It's a pure play on this business. Its labour costs are lower than those of competing Japanese companies. In Indonesia, I continue to like Bank Rakyat, my biggest weighting in Dynamic Global Value. It focuses on rural Indonesia. I have owned this stock for seven or eight years. It is still cheap compared to its peers in Indonesia, but more expensive than western banks.

Q: Patricia?

Perez-Coutts: We have 72 names in AGF Emerging Markets. We are fully invested. China represents 17%, Brazil is about 14% and India is about 10%. South Africa is another big weighting at 10%. We will not invest more than 20% in any one country. We are a growth-at-a-reasonable-price manager. We invest in companies that are fairly liquid in terms of their float. Also, we do not own very much in any of these names. These both help to control risk. I only buy companies that have earnings and at least three years of cash-flow returns of at least 10%.

In Asia, the latest name that we added is called Tripod Technology Corp., a manufacturer of printed circuit boards, based in Taiwan. PCBs are deemed to be commodities, but in Tripod's case they are becoming more specialized and design-oriented. Tripod works for the big technology manufacturers. The stock came off. Tripod has strong cash flow and is a consolidator in its business. It has a 5.5% to 6% dividend yield. Demand for its products is strengthening.

Also in this sector, we have owned a stake in Taiwan Semiconductor Manufacturing Co. since 2003. The company is doing well. It was left for dead after the tech bubble burst, but it had a good history of returns on invested capital.

In China, we have added to some of our existing names, for example, China BlueChemical Ltd., a fertilizer company. It's a low-cost producer. Its parent company is CNOOC Ltd., which I also own.

Wong: So do I. CNOOC is the largest oil exploration and production company in China. It has one of the best production growth profiles in the world. It has sophisticated management. The company is more return-driven than its Chinese peers. We have owned CNOOC for a long-time. It has done well.

Patricia Perez-Coutts, Chris Arbuthnot and Chuk Wong

Photos: www.paullawrencephotography.com

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Sonita Horvitch

Sonita Horvitch  

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