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JPMorgan Brazil eyes Bolsonaro reforms ahead of survival vote

13 August 2019

JPMorgan Brazil urges investors to be patient for an uplift in Brazil's economy and a rebound in stocks, driven by president Jair Bolsonaro's 'ambitious' reforms.

JPMorgan Brazil (JPB) is eyeing a potential reform-driven bounce in Brazilian stocks as the trust's survival vote looms next month.

The £31 million trust, the only investment company focused solely on Brazil, underperformed in the year to end of April. Net asset value (NAV) total returns stood at 3%, while the share price fell 1% versus a 7% gain in the MSCI Brazil 10/40 index.

The trust was hurt by volatility in the run up to Brazil’s general election in 2018, along with inflation worries and depressed market sentiment.

Since the end of April, the trust has rallied, however, with the NAV up 21.5% and the shares rising 14%, versus a 18.3% jump for the index.

Chairman Howard Myles urged investors to consider the ‘potential upside if the government's reform programme proceeds as currently envisaged’. He argued it ‘would not be in shareholders’ interests to liquidate’ the trust as a continuation vote is held at the annual general meeting on 10 September.

A continuation vote takes place every three years, though if this year's vote passes, the board has proposed a further vote next year.

He pointed out that Brazil’s economic growth over the medium and longer term was largely dependent on the extent of reforms to social security, taxation, labour markets and education, as well as continuation of its privatisation programme.

Brazil’s far-right president Jair Bolsonaro was elected to office in October on the promise he would reform the country’s pension system, which had left it laden with debt. Bolsonaro’s victory saw Brazilian stocks rally.

Last week, Brazil’s lower house of Congress approved a bill overhauling the pension system, promising to save 993 billion Brazilian reais (£194 billion). It looks to do so by raising the minimum retirement age and reducing worker benefits. Bolsonaro’s bill will now face a vote in Brazil's upper house.

‘If the social security reforms obtain this final approval, the momentum will exist for the government to move on to the other reforms... with tax reform likely to be the priority,’ said Myles.

‘If passed, these additional reforms will raise the long-run sustainable rate of growth of the Brazilian economy substantially.’

The recent signing of a free trade agreement between South American trading bloc Mercosur, of which Brazil is a leading member, and the European Union, is also expected to have a positive impact on many of the key sectors in the Brazilian economy, he added.

‘Ambitious’ reform plans

Managers Sophie Bosch de Hood and Luis Carrillo said Bolsonaro’s wider reform agenda was ‘ambitious, requiring considerable political co-operation not yet in evidence’. Though they were ‘cautiously optimistic’ about the approval of such reforms.

‘The recent rate cut in July puts Brazil in the camp of emerging market countries easing to boost growth,’ they said.

‘The macro picture in Brazil is still fairly weak, which means we focus on companies that can deliver above-average growth and demonstrate resilience in the face of a slower macro backdrop.’

The recent stability in interest rates benefited the trust’s 4.5% holding in IRB Brasil RE (IRBR3.SA), the largest reinsurance company in Latin America.

The prospect of a recovering economy also prompted the managers to add to its position in Brazil second largest insurance company, SulAmérica (SULA11.SA), a 2.9% position at the end of April.

However, the managers warned of Brazil risked falling back into recession should Bolsonaro’s government fail to overcome opposition to his reforms.

‘There are positives: privatisations are planned for several state-owned entities and the Bolsonaro government's more pro-business stance should fuel growth,’ they added.

‘Our portfolio is positioned for a recovery in the domestic economy once the current challenges have been overcome, poised to tap into a more positive long-term outlook for Brazil.’

Investment company news brought to you by Citywire Financial Publishers Limited.

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