Business & Finance

J.P. Morgan Asset Management’s investment trust team took a group of clients to Sao Paulo and Rio de Janeiro to see at first hand the extensive growth opportunities and the challenges that exist in the 5th largest country in the world.

Rio de Janeiro Brazil Iconic Statue of Jesus

As investors, all too often tend to look east to Asia for Emerging Market exposure and do not give Latam and in particular Brazil the attention it perhaps deserves.  This is probably due to a lack of investable products dedicated to the region but also because energy and material companies dominate the Brazil stock market meaning this exchange is seen as another play on global and Asian growth.  However, materials and energy account for a low percentage of Brazil GDP and as is often the case that the stock market does not reflect the economic opportunity.

We think that over time this will change and this 6 day research trip highlighted some of the investable opportunities that currently exist for this exciting and growing country.

The group met with senior management of companies from a diverse group of sectors and heard about the opportunities and challenges with the help of our local investment team and a major broker to get a thorough 360 view of the opportunity.  The following is an account of our meetings on this trip.

Some of the companies we met with are held in the JPMorgan Brazil Investment Trust plc which was launched in 2010 with the objective of capturing the domestic opportunity.  Please note that some of the companies mentioned in this paper represent current holdings of the JPMorgan Brazil Investment Trust plc.  However, it cannot be assumed that these types of investments will be available to or will be selected by the fund in the future. The mentioning of these companies should not be interpreted as a recommendation to buy or sell.

Sunday 14 October

As we fly into Sao Paulo we can see the sprawl of what is the seventh biggest city in the world by population and the largest in the Southern Hemisphere and the Americas.  We are beaten into the airport by an Air France flight and as we queue from the plane to passport control it is clear that the city will need to invest heavily into airport infrastructure in the future.  It’s a pretty grey overcast day and as we travel into the midst of the city we get a sense of how closely the rich and the poor live together.

The Unique Hotel San Paulo We check into the ultra-modern Hotel Unique and spend the rest of Sunday resting ahead of our busy agenda this coming week.

Monday 15 October

We wake up to a beautiful day in Sao Paulo and with all the group feeling a little more rested we leave the hotel in our minibus through the heavy traffic to our first meeting at Credit Suisse First Boston (CSFB).  We begin the day with a presentation on the economic backdrop from Nilson Teixeira, one of the economy strategy team who first came out with the controversial estimate that Brazilian Growth Domestic Product (GDP) growth would be just 1.5% in 2012.  Their estimate was initially dismissed by the government and others as being ridiculous but has proven to be spot on.  This should be a great insight to kick off our tour and help set the scene.

We run through some projections for the year ahead.  Infrastructure investment has been a key driver of GDP growth and this was weak in 2012, but should return in 2013 and with all things being equal overall GDP growth should return from 3.5% to 4% for the next year.  Inflation is expected to be stable at around 5.5%, and politically the country remains stable too, with strong support for President Dilma Rousseff in recent municipal elections.  She is fighting corruption, and domestic consumption is growing although there is still wide income dispersion between rich and poor.

Brazil is doing very well in the agriculture sector and is the largest citrus producer in the world.  Wage inflation has been an issue and this, together with the strength of the currency, has impacted worldwide competitiveness for industrial production.  The Olympics should add about 0.5% to GDP figures for the next few years.  Recent developments in cutting taxation in electricity tariffs and infrastructure projects for roads and rail will be very helpful for industrial output.  Trucks are very important for goods transportation, and energy price volatility creates problems for investment into more efficient vehicles and input costs.

Contrary to popular perception, Brazil’s economy has a low reliance on exports.  Instead, consumption is the biggest component of GDP, and this is also a major theme of the JPMorgan Brazil Investment Trust plc.  As Brazil’s economy grows, more and more of its large population (7th largest in world) are joining the middle class, with expectations of the same kind of consumer goods we take for granted in Europe and North America.

On to the US consulate: we get across town in relatively good time only to spend about half an hour getting through security.  Not surprising, so we are on our best behaviour.

We spend a fascinating hour with Dennis Hankins, (previously the deputy US chief of mission in Khartoum, the capital of Sudan).  He gives his perspectives and reinforces the view given earlier by Nilson that agriculture will be a key sector and the country will become one of the largest global producers in time. This should benefit the wealth in the central region of Brazil.

Dennis thinks Dilma will remain very popular.  Having never held a political position previously, she represents the upward mobility to which the domestic worker aspires.

There are strong domestic drivers in place for expanding middle class wealth (classed as those with incomes of $610 – $2160 per month).  The discovery of large oil reserves in the pre-salt layer of the continental shelf could transform Brazil from simply a major player in natural resources to a global leader.  The 2014 World Cup and the 2016 Olympics should also have a positive impact, as will the stability of the new government administration.

On the flipside, while unemployment at 5.3% remains at an all-time low despite slowing global growth, it will probably tick up in 2013 in response to the world economy. Reforms are needed in education, infrastructure and taxation.  Investment in infrastructure is desperately needed, as dependence on trucks limits competitiveness. By way of comparison, US agriculture factors in a cost of bulk movement at $40 per tonne, but due to its dependence on trucks Brazil’s cost is $240 per tonne.

Dennis tells us that the US is Brazil’s second-biggest trading partner. Brazilian produce dominates the US citrus market, while at the other end of the scale, aerospace group Embraer is now manufacturing jets in the US. Conversely, US giants 3M, Cisco, Dell and Hewlett Packard are all developing intellectual property in Brazil, where the most educated segment of the workforce is very strong. Sao Paulo is the biggest US visa issuing post in the world, and for every $2 the US invests in Brazil, Brazil invests $1 in the US.

The sun shines on the group as we head back to the Credit Suisse offices, where we meet Duratex plc for a lunch full of fresh fruit and healthy stuff.

Duratex is the largest manufacturer of wood panels in Latin America. The company also makes metal fittings and metal and china bathroom fixtures. Its Durafloor brand is the Brazilian market leader in laminated flooring, and in metal fittings and sanitaryware it also leads the market with its Deca and Hydra brands. The high quality of its products means it can command a premium price relative to its competitors in both these market segments.  Duratex is controlled by Itausa Group (which also controls banking giant Itau) and Companhia Ligna.  Its 10,100 employees work in 14 manufacturing plants across Brazil, as well as a unit in Argentina.  The company has grown fantastically well, although the cost of labour is an issue, as its unionised workforce has guaranteed salary increases linked to the rate of inflation.  It has recently acquired a Colombian company called Tablemac, which could signal a strategic move into other Latin American markets.

After lunch we plunge into the traffic for an hour’s journey across town.  Sao Paulo has a strange layout and appears not to have a historic centre or a high rise indicating premium real estate.

We go to meet Raia Drogasil, Brazil’s largest pharmacy chain.  The company was created in 2011 from the merger of two groups, Droga Raia and Drogasil. The group currently has more than 800 stores – more than double the number it had five years ago – and over 17,000 employees.  As convenience is a huge factor for its customers, who are mainly from demographic groups* A and B, it is not closing any stores as a result of the merger.  Drugstores are the main means by which the population has access to medication and hygiene and beauty products.  The format of Brazilian pharmacies is more similar to those in the UK, which primarily dispense medicines and sell over-the-counter remedies and cosmetics, than in the US or other countries, where drugstores may sell a wide range of goods including cleaning products and even food. Although Raia Drogasil is the country’s biggest pharmacy chain, it still has only 9% market share and thus its management say it has great potential to grow further.  It has seen 19% growth this year and expects similar in 2013, with growth unlikely to dip below 15% in the near future.  The company is one of the biggest holdings in JPMorgan Brazil Investment Trust plc.

From a pharmacy to a shopping mall, we round off the afternoon with a bit of retail therapy at recently opened JK Malls.  This has three floors, with the most expensive brands on the ground floor.  The wealthy shoppers of Sao Paulo drive to the mall, and like to be in and out quickly and discreetly when they buy their Louis Vuitton handbags.  The ground floor is the nearest to the parking lot for this reason and it certainly creates a wow factor.  The next floor up is for more accessible brands, while the top floor has even more affordable brands, restaurants and a cinema.  This is the busiest floor by far.  Brazilians like ‘going to the mall’, and this one is very open, modern and impressive.

JK Malls is run by Iguatemi Malls, a company that designs, plans, leases and manages shopping centres.  Set up in 1979, Iguatemi went public on 6 February 2007.  Shopping malls are an increasingly important part of the Brazilian retail scene, with much growth potential owing to the relatively low penetration (19% in 2010 versus 53% in Mexico and 54% in the US).  There is also potential for consolidation of the market, as the top three players have a market share of 28% versus 60% in the US.  Shopping malls are a key beneficiary of the positive macroeconomic drivers in Brazil, with low unemployment, increasing disposable incomes and greater participation of women in the Brazilian labour market all providing a boost to retail spending.

Dinner this evening is at the Figueria Rubaiyat restaurant, where we are joined by Emerson Leite and Edward Weaver, the co-heads of Latin American equity research at Credit Suisse.  We sit under the branches of a 150 year old fig tree, and I think the fig tree in my garden needs to buck up its ideas if its ever going to be this big.  We discuss how hot the Initial Public Offering (IPO) market got in 2010 and how this has since dried up, and the opportunity for this to improve.

Back to our hotel for a nightcap on the top floor and to look out at the sprawl of SP, which looks much cooler by night.

Tuesday 16 October

Despite most of the group waking early at 5am, stuck on UK time, appetites remain good and a strong showing for breakfast sees a widespread appreciation of Eggs Benedict as another sunny day commences.  We head off in good time now wise to the congestion of Sao Paulo traffic.

The first meeting of the day is with Bradesco.  For almost half a century, until the merger of Itau with Unibanco in 2009, Banco Bradesco was Brazil’s largest bank, and it is one of the five largest holdings in the JPMorgan Brazil Investment Trust plc.  With an open door strategy it has 67 million customers and a large national footprint of 4,650 branches.  While Bradesco has shown strong profitability over the past decade, there are some pressures from structurally low interest rates, government intervention, and credit spreads, as well as a relatively high delinquency rate in the banking sector as a whole.

They expect loan growth to be about 12-15% with the majority of growth coming from mortgages in the domestic market.  They see Return on Expenditure (ROE) of 20% for 2012 and a sustainable rate of 18% going forward.  Given growth in wages which other meetings have highlighted, we are not surprised to learn that payroll loans has been a very profitable area of growth.

We leave the safety of the gated community where Bradesco offices reside and move on to Multiplus.  Things are not looking quite so plush as we exit the gates, as the driver central-locks the doors and we head back into the congestion.

Multiplus began as a loyalty card for customers of the airline TAM, a member of the Star Alliance, and has expanded to include other partners including banks and Shell petrol stations, so it is now something like the UK’s Nectar card.  Its offices are similar to a media company, with executives dressed in relaxed attire.  There is a confident buzz in the air, and as we wait to meet the investor relations contact and sip own-branded water we observe execs laughing and joking.  They are clearly doing well.

Between 2002 and 2010, international tourism as measured by airline departures in Brazil more than doubled from 2.3 million to 5.3 million, a demonstration of Brazilians’ growing wealth as more of them holiday abroad. The penetration of air miles schemes in Brazil is still low compared with other countries, meaning Multiplus has significant growth potential.

Following the IPO of Multiplus, TAM still has a 73% stake which in time will drop to 50%. The scheme has 10 million subscribers and 200 partners.  It’s a pretty complicated business model but in a nutshell, unlike Nectar users, Multiplus users have to use their points within a set timeframe.  With Multiplus negotiating on the transfer value of points from different organisations it can make money out of the effective spread this creates, as well as if points are not used.  Our group found this an interesting business focussing on demographic groups* A and B.

Lunch is back at the J.P. Morgan Asset Management offices with Sebastian Luparia, the manager of JPMorgan Brazil Investment Trust plc.  Sebastian and his team are based in Sao Paulo, which gives them a great insight into their local market that a London-based team would struggle to match.  This is followed by a macro meeting from a JPM Strategist.

After a busy agenda we reconvene at 7pm and drive to a very nice district where we have dinner at Parigi, a classic Italian restaurant.

We meet with Odontoprev, a leading provider of dental insurance.  The company develops customised dental plans for corporate clients, labour unions, insurance companies and associations.  The company has formed an association with Bradesco, who we met this morning, to bring new growth opportunities.  In addition, expanding beyond the Small Medium Enterprises (SMEs) and dental group insurance into individual insurance products will add breadth and higher priced products.  It’s a fantastic business and has little operating risk.  Given the profits and growth the group questions whether the company has considered sponsoring Ronaldinho’s and Ronaldo’s teeth!

We return to the hotel after a filling experience (sorry!) and given it’s our last night in Sao Paulo we head up to the rooftop bar for some drinks.  For a Tuesday night the bar is packed and there is no holding back for the glamorously dressed young who sip champagne.  The group show strong Anglo Saxon restraint and sample some of the local brew.

Wednesday 17 October

This morning we have a breakfast meeting with Andrew Bergstein CFO of residential builder and development group Gafisa one of the country’s leading homebuilders.  Gafisa operates throughout Brazil and specialises in high-quality residential projects for all income segments.

It came to the market in 2006 raising R$500m, bought a 60% stake in Alphaville (a land developer) in 2007 and in 2008 acquired a 60% stake in Tenda, which serves the low income sector of the market.  Gafisa as a brand is a middle to high-end residential developer.  The group is nicely diversified across all the demographic groups* but it has not been plain sailing with a large amount of debt – R$4bn – 2011 saw a massive de-rating on the stock price.  However, at the high end Gafisa has good demand, with a three-month waiting list and Alphaville typically selling 100% of its development potential in a weekend with no balance sheet risk.  Alphaville seems to be the most attractive part of the business, with return on equity of 46% and margins at 53%, which has seen profits grow from R$100m in 2007 to R$1bn this year.

The Gafisa group has developments in 130 cities across 22 states, and the one we visit in Sao Paulo today is a very luxurious 500m2 apartment that would sell for £1m.  It’s very reassuring to see that all the bathroom furniture is made by Duratex subsidiary Deca and funny to see the gender split in the group, with the boys clustering in the TV room and the girls socialising in the plush sitting room.  Gafisa is not currently a holding in the portfolio.

We lunch at the Armani cafe in another of the shopping malls run by Iguatemi, whose JK Mall we visited on Monday.  This mall looks a little dated but it remains the bedrock to their business as they can charge very high, undisclosed rents to their tenants.  The management are very impressive and aware of their niche compared to other global mall operators such as Westfield.  Competition from such international companies is inevitable but they will have to start from the ground up to go up against Iguatemi.

It’s getting pretty muggy and we head to the airport to meet with GOL, the first and largest low-cost airline in Latin America, before flying to Rio.  GOL is the second-largest airline in Brazil, with a 34.1% share of the market compared with TAM’s 39.7%.  In 2011, approximately 8.7 million middle-class passengers flew for the first time in Brazil.  This was made possible by the combination of increases in wages and lower air ticket prices.  GOL’s branding has that orange glow associated with convenience and akin to Easyjet.  We meet with the Investor Relations (IR) in some scruffy offices at the back of a hangar.  It’s clearly a budget operator and with domestic flights in Brazil growing – 100 flights a day between Rio and Sao Paulo – it should be well placed.  GOL only operates the Boeing 737, 700 and 800, which makes infrastructure straightforward, and it has just placed another large order with Boeing.  That said, it has not been an easy time following a breach of a covenant and as we start to hear about this the lights go out in the building.  Not great timing but the IR carries on so he is clearly used to it!  We come away unimpressed but observe that the only silver lining is a loyalty card programme which could IPO in the future.  GOL is not currently a holding in the portfolio.

During the trip we’ve seen that Brazil is under-served by infrastructure and we hear that it is going to take 5 to 10 years to update the airports, which will clearly not be in time for the World Cup or the Olympics.  Consequently schools and companies will take holidays early during both events to alleviate the congestion that government-owned airports anticipate.  The negatives will be offset by tourism for the future, though, and Brazil already gets 10 million visitors a year, mainly from the US and Argentina.

We board a flight – thankfully with TAM rather than GOL – to Rio de Janeiro, which takes about an hour to cover what is really quite a tiny distance in the context of this huge country.  Santos Dumont airport is shabby to say the least. We taxi through yet more traffic and as the sun sets we arrive at none other than the Copacabana Palace Hotel.

After the excess of the night before the evening meal is some sushi at the Manineko restaurant in downtown Rio which following a group swim in the hotel pool makes for a healthy conclusion to the day.  We take some time to reflect on the first half of our trip and the busy day in store tomorrow.

Thursday 18 October

Another day, another airport as we head back to Santos Dumont for a flight up to Campos in northern Rio state.  It’s a beautiful day and we’re up in good time to beat the traffic.  As we drive along the beach we see the population of Rio out taking their morning exercise, with people running and cycling along the beachfront and already the odd game of footy and volleyball kicking off. It’s clear why corporate headquarters predominantly locate in Sao Paulo, as Rio has so many obvious distractions!  It’s clear Boris has been to town and Rio is following London’s lead to address the congestion issues with their own domestic bike scheme, in place for a matter of months.

On arrival in Campos we get a bus down to the site of Acu, an exciting shipyard development. Our group questions why this could not be done from Rio, to which the IR replies “you’ll see”.

We arrive at the site entrance of this visionary development by OSX, one of the companies owned by Brazil’s richest man Eike Batista.  OSX was created as the oil services arm of Batista’s EBX group, with an initial objective of catering oil and gas production platforms to sister company OGX, but also to tap an opportunity of an undeveloped shipyard industry in Brazil in face of local content requirements and high demand.

OSX has been increasing its profile with third-party orders recently, marketing the shipyard to secure orders to one support vessel and 11 oil tankers.  There are also ongoing negotiations with Sete Brasil to build drilling rigs for Petrobras, and further ongoing bids. OSX used to be one of the biggest energy sector holdings in the JPMorgan Brazil Investment Trust plc.

The site is colossal at 3.2km2 (the size of New York’s Central Park), with an initial target of 180,000 tons a year of steel processing capacity expandable to 400,000 tons a year.  Following a safety briefing we hear from Exec Manager and marine engineer Ivo Dworschak Filho, who could not resist the opportunity of this project before retirement, and his enthusiasm overflows.  There is a constant stream of trucks bringing in rock for the ballast for the concrete plates that will form foundations for the sheds, yards and dry dock, which will build ships, rigs and specialist drilling equipment.  The immediate demand is from oil companies looking to drill in the massive Tupi oilfield 300 miles offshore and under 2.5km of water.

The yard is also well placed to serve West Africa.  For a sense of the risks, though, it’s only necessary to look at BG’s earnings guidance released on 31 October and it’s -35 point impact on the FTSE 100.  This also gives a sense of the technical challenges of this oil discovery.

We get back on the coach to return to Campos, stopping at a technical college on the way also built by OSX.  This is training up the young to be welders, sheet cutters and electricians to build the equipment.  It is another demonstration of the strong domestic drivers for growth, and given the planning that has gone into the project and its potential it is not surprising to learn that Hyundai Heavy Industries has partnered with OSX to ensure quality and efficiency.  OSX is not currently a holding in the portfolio.

We fly back to Rio and the group are buzzing, having witnessed something pretty amazing. With so much thought-provoking stuff we’ve built up quite an appetite.  We head for dinner at the Churrascaria Porcao, which is an ‘all you can eat’ meat fest.  A good time is had by all and the evening concludes with some of the group showing some excellent Samba moves in the nearby Lapa district.

Friday 19 October

Today is the last day of our trip, but we are not slacking off on the pace.  The group is clearly feeling guilty about the lack of 5 a day intake from yesterday and as the day kicks off with a breakfast meeting at our hotel with Brasil Brokers, a large amount of fruit is consumed.  Brasil Brokers is the country’s largest estate agency and also has a corporate real estate business. Incorporated in 2007, the company has grown aggressively through acquisition, and is now present in 16 of the 27 Brazilian states, a geographical footprint that covers 79% of the country’s population and 87% of its GDP.

From here we head to a meeting with another shopping mall operator, Brazil Malls. BR Malls is the market leader in Latin America and was created in 2006 out of a private equity deal that consolidated a disparate collection of family-owned assets into a portfolio of malls, making an immediate return by increasing the efficiency of properties and creating economies of scale through the attainment of a meaningful market share.  Since its IPO in 2007 it has grown its portfolio aggressively, from just seven malls to 46, with 23 acquired in 2008 alone.  As noted earlier, there is great growth potential in the under-penetrated and fragmented shopping mall business in Brazil, which offers high margins and predictable cashflow and revenue hedged with inflation adjustments. BR Malls benefits from the bargaining power its scale brings, as well as having the most return-orientated strategy compared to most other companies in the sector.  BR Malls is the second-biggest holding in the JPMorgan Brazil Investment Trust plc.

They are very shrewd operators, growing the fastest in the sector and with excellent efficiency from their 9,000 tenants helping them to achieve an internal rate of return of 13.3%.  The top three mall operators account for 25% of the market and BR Malls has its own dedicated M&A team to take advantage of the consolidation they expect and the opportunity they see in demographic group* D.   Again this meeting confirms the J.P. Morgan team’s view that the domestic consumption story is here to stay for a while.

Our third meeting of the morning is with Wilson Sons, a provider of integrated port and maritime logistics and supply chain solutions.  Founded in the north-east of Brazil in 1837, Wilson Sons is one of the country’s oldest companies. Given everything we have heard this week this diversified group clearly can capture revenues from one or many parts of the shipping supply chain.  It operates container terminals, logistics, towage, offshore support services, shipping agency and shipyards.  The management see good growth in their container and oil servicing divisions and have 50% of the market in tug towage. Through their shipbuilding they also design and build new tugs for the ever larger ships that the market demands.  The firm sees good growth coming through next year from development of its container terminal Rio Grande, and its other shipping terminals Salvador and Brasco are operating at good efficiency.  The continued strength of the Oil & Gas sector gives a very positive outlook for the company, with demand for offshore support vessels estimated to grow from 400 currently to 686 in 2020.  In addition, exports and imports have resulted in a compound annual growth rate of 15.1% from 2005 to 2012.

We lunch with the Chairman of Valid at the Margutta Citta, an Italian restaurant in Ipanema.  Valid used to be a subsidiary of De La Rue, and specialises in providing services to the banking sector and government entities. The company prints bank cheques, account statements, bills, direct mailings, envelopes, promotional material, drivers’ licences, identification documents and security forms, and telephone, pre-paid, credit and debit, commercial, and smart cards.  It is exposed to many areas where you would expect domestic demand growth to come through in areas Westerners take for granted.  In 2016 the US will need to put chips into its bank cards and Valid are hopeful the firm will be successful in winning some of this business.  Management are very conservative, the firm has little debt and it is easy to understand the rating of the company.  A major potential growth area for Valid could be the development of a national ID card system, as well as government attempts to crack down on the large number of unlicensed drivers in Brazil, which has over 60 million vehicles but fewer than 50 million licence holders.

We say our goodbyes and head to our final meeting of our trip.  It’s hard to believe the week is virtually over but the group are now very familiar with the domestic opportunity.  Perhaps fittingly, the last meeting is with Brazil’s biggest company, Petrobras.

We had hoped to meet with CEO Graca Foster, but unfortunately the company is about to release a cost efficiency programme for the Tupi oilfield and she has to attend a press conference.  We meet the chief geologist and IR contact instead.  It’s clear this is a state-owned company as the offices are austere and functional.

To exploit the huge discovery in the offshore pre-salt layer means capital expenditure of over $200bn.  This is currently under implementation for Petrobras, and with 2007 estimates at 12,000 barrels per day now upgraded to 20,000 BPD on good flow analysis, the strategic significance is obvious with a further $30bn under evaluation.

The company is looking forward to decades of growth, but as we ask our questions the answers are obviously well rehearsed and very considered, and we learn that there is clearly tension over the delivery of what has been promised.  Big orders have been given to domestic suppliers and, as we have witnessed at OSX and Wilson Sons, these will consequently drive domestic growth.  Given the state majority ownership this makes us consider Petrobras an unattractive investment, as the company has much pressure for securing economic growth.  The capex figure really highlights the issue and when you consider that in 2007 Petrobras had seven drilling rigs for the Tupi field and now there are 40 rigs, you realise this is less of a commercial project and so much more of national strategic importance.  That said, they are working off a break-even figure of $45 per barrel and are very aware of ensuring they avoid the errors of BP in the Macondo well disaster.  It’s a fascinating hour spent hearing about development of refineries and of coastal service points.  It’s clear that many of Petrobras’s partners are very bullish about the future.

JPMorgan Brazil Investment Trust plc does not own Petrobras at all, which is a significant decision when you consider that the firm accounts for 18% of the MSCI Brazil index and roughly 9% of the constrained MSCI 10/40 Brazil Index. In addition to wanting to avoid the political pressure on such a huge state-owned enterprise, the trust’s managers prefer to concentrate more on domestic development, consumption and infrastructure, with holdings falling broadly into three camps – quality companies with a stable and predictable outlook over three to five years; restructuring stories; with the potential to graduate to quality companies over time and shorter-term tactical opportunities.

It has been a fascinating week and we have learned much about many different businesses and sectors.  We have highlighted the companies which are, and which are not held in the JPMorgan Brazil Investment Trust plc.  For the sake of completeness anyone considering investing should bear in mind the nature of this trip and not base an investment decision on this document alone.  It’s clear that Brazil is going places and the structural drivers, all things being equal, are in place to achieve the growth potential.  It also appears that 2012 has been a tough, almost pivotal, year and GDP growth should moderate back up towards 3.5-4%.

The research group came away with a strong sense of the long-term growth potential but also an awareness of the short-term headwinds.  Wage inflation, high fuel costs and major infrastructure bottlenecks are all issues that have impacted on growth in 2012.  However, we have all been so impressed by the quality of management of the companies we have met.  Their handle on how inflation impacts their business, the entrepreneurial spirit and the sincerity and honesty with which they speak gives you confidence that they will navigate their way through these headwinds.  The JPMorgan Brazil Investment Trust plc aims to capture this domestic growth opportunity and we are well positioned with a strong and local investor team to maximise the opportunity.  When much of investor attention focuses East to China, we hope this blog encourages you to look West and to the opportunities that Brazil can offer.

Demographic Group Definitions:

There are several different concepts of social classes in Brazil, but the one that is mostly adopted by the market classifies society as letters from A to E. This definition is based, overall, on the households gross monthly income, as it follows bellow:

Class A: above BRL 10.200

Class B: above BRL 5.100

Class C: above BRL 2.040

Class D: above BRL 1.020

Class E: below BRL 1.020

As the differences in cost of living is quickly increasing between the metropolitan and rural areas of Brazil, this demographic segmentation will translate into different purchasing power depending location of the household.

* Source: The Brazil Business, as at 02/05/2011.





Key Risks: JPMorgan Brazil Investment Trust plc

■ Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems, and may be illiquid.

■ Exchange rate changes may cause the sterling value of underlying overseas investments to go down as well as up.

■ Investments in smaller companies may involve a higher degree of risk as these are usually more sensitive to price movements.

■ Investment trusts may utilise gearing which will exaggerate market movements both down and up which could mean sudden and large falls in value. For further details, please refer to the trust’s annual report and accounts.


Monday, April 8th, 2013