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[LONDON] Mark Mobius hasn't given up on Brazil. Yet.
The chairman of the emerging-markets group at Franklin Templeton Investments is looking for investment opportunities among Brazil's battered equity market, he said in a blog post Tuesday. There's an opportunity for "tremendous changes," should Brazilian leaders find a way to tap resources more effectively, he wrote. The Ibovespa stock gauge rallied for a seventh day, leading gains among major benchmarks in the Americas.
Latin America's biggest economy is facing its longest contraction since the 1930s amid a corruption scandal and falling commodities prices. Brazil's economic malaise, exacerbated by President Dilma Rousseff's inability to shore up the budget because of her dwindling popularity, has pushed the Ibovespa down 34 per cent in dollar terms this year through Tuesday. The real lost 31 per cent over the span.
"While Brazil's situation seems dire, this does not mean that we, as investors, will be abandoning Brazil or Brazilian stocks," he wrote. "When investor sentiment is at extreme lows, I believe the best opportunities can be uncovered if one is patient, and selective." Mr Mobius didn't cite any specific company names.
The Ibovespa is poised for a third year of declines, the longest losing streak since 2002. The plunge has pushed its valuation to 11 times estimated earnings, or 18 per cent below the average in the MSCI Emerging Markets Latin America Index, according to data compiled by Bloomberg. Lender Itau Unibanco Holding SA is at the lowest valuation level since 2008, while brewer Ambev SA is trading 14 per cent below its peak in 2012.
Still, without spending cuts and higher taxes, both of which are facing opposition from lawmakers and the general public, "the near-term prognosis does not look good for Brazil," wrote Mr Mobius.
After seeing its economy quadruple in dollar terms during Luiz Inacio Lula da Silva's presidency from 2003 through 2010, Brazil was stripped of its investment-grade credit rating by Standard and Poor's last month, citing an erosion of fiscal accounts.
In addition to bolstering the government's accounts to avoid another downgrade, Ms Rousseff and lawmakers must work toward reducing government bureaucracy, supporting the expansion of small- and medium-sized companies, and making it easier to do business in Brazil, said Mr Mobius. They should also focus on fighting corruption, he wrote.
"There has to be a change in attitude," Mr Mobius said. "If the economy does not revive, companies' earnings will likely not be very good, so we do need to be cautious," he added. "The potential growth is so great in Brazil that it is a shame the government hasn't been more effective." In Latin America's largest economy, a sweeping graft scandal engulfing state-run oil giant Petroleo Brasileiro SA and the country's biggest builders has pushed the nation toward its deepest recession in at least a quarter-century and left Rousseff fighting for her political survival.
There are other areas of concern in the region, which is forecast to show the first economic contraction since 2009. The world's highest inflation rate has left Venezuela struggling with shortages of food and medicine, while Mexico is trying to revive growth after its first attempt to sell licenses for oil drilling failed to attract major oil producers. Chile and Peru, which are among the biggest producers of copper and zinc, have seen export revenue tumble as prices for the metals have fallen.
Even with all of the headwinds, Latin America is "an attractive investment destination," Mr Mobius said, without mentioning specific countries. The region will benefit from longer-term demand for basic materials that will improve with global growth, he said.
Federal Reserve Raw materials and emerging markets have surged since the end of the third quarter on bets the Federal Reserve will keep rates lower for longer. The weakening US currency boosted dollar-denominated commodity assets.
The recent selloff in emerging-market assets, including Mexico and Malaysia's currencies, has opened up investment opportunities not seen for decades, according to Franklin Templeton's Michael Hasenstab, who's well known for making contrarian bets. Developing nationsare set to record the first net capital outflow since 1988, the Institute of International Finance estimated last week.
"On a valuation basis, this is not a once-a-decade, this is a multi-decade opportunity to be buying very cheap assets," Mr Hasenstab, who oversees 30 funds with US$143 billion in assets, said in an interview posted on YouTube Monday. "We are not buying everything," but "there are a handful that have been caught up in the turmoil that we think are diamonds in the rough," he said.