An emerging markets fund manager at Global Allianz, Michael Konstantinov manages the recently launched Allianz RCM Brazil Fund. We asked him about the political situation in Brazil and investing in developing economies.
1. How long have you been involved with emerging market fund management?
Since 1998 I have been part of the Global Emerging Markets Equities team. I am based in Frankfurt. My team and I manage over £1,500million in respect of Allianz Global Investors’ total BRIC mandates.
2. What skills and experiences have you found most beneficial for investing in emerging markets?
My stock picking process is a tried and tested process. In brief, top down considerations help determine the selection and allocation of assets to a specific sector or country within the investment universe while the bottom up research process helps select the individual companies for the portfolio.
As part of my research I like to spend time ’in the market‘ to get a feel for the particular market in question. For example, in August this year, I attended an investment conference in Brazil. While I was there I visited the companies we see as potential candidates for the Allianz Brazil Fund portfolio.
I am firmly of the opinion that valuable information can be gleaned by actually visiting the companies, talking to their management and staff, visiting their production facilities and seeing their products being made.
3. What are some of the main trends that have affected emerging markets over the last year?
2009 marked an important step in the transition towards an emerging market led global economy. The debate on economic decoupling was settled with the global recovery led by China, Brazil and India only followed by developed economies in the next quarter.
We remain positive on Global Emerging Market equities and specifically the BRICs (Brazil, Russia, India and China). Sound economic fundamentals in most markets combined with good growth prospects provide the ground for further upside in BRIC equities.
We believe the following five investment themes that have contributed to this recovery will remain key drivers within the BRICs:
- Domestic demand will continue to show impressive resilience as a result of the growing middle class in many emerging market countries.
- We expect continuously strong demand for commodities (both basic and agricultural commodities) and expect them to remain a key investment theme going forward.
- Infrastructure build-out along with the connected fixed asset investment will be driven by continuing government spending and the regaining strength of the private sector.
- We expect supply and demand for oil to remain balanced at current levels and the oil price to stay within the current supportive price range of between 70-90 USD. In this scenario, oil related projects remain an important investment theme.
- Environmental industries and technologies, such as ethanol in Brazil and the solar industry in China, will also remain a focus of interest.
4. Allianz Global Investors recently launched the Allianz RCM Brazil Fund. Why has the fund been launched now?
Brazil is in the enviable position of having so many positive factors in place from both an economic and investment perspective; a strong, fast growing economy, a stable government, a large, young population with increasing affluence, huge commodity resources and a well developed equity market that allows investors to access these opportunities.
Brazil is best known for its huge commodity resources – iron ore, oil and agriculture and there will be plenty of great investment opportunities in these areas. However, we will also be focusing the portfolio on companies that are benefiting from increasing domestic affluence.
In terms of valuations, we believe that now is a good time to be adding Brazil to a diversified portfolio.
5. Do you expect the landscape for investors to change as a result of the presidential elections, which will be decided in a run-off vote at the end of October?
The run-off will be between Dilma Rousseff and Jose Serra (PSDB party). The biggest surprise was Marina Silva from the Green Party, who beat opinion polls by coming in third with around 19% of votes. Voters now have an extra month to analyse the proposals of both candidates, but we believe the final election result will be unlikely to change the broader investment case for Brazil and that the focus will be on continuity.
The key point here is that, regardless of who wins the election, the overall economic policy will be based on three economic pillars: floating foreign exchange, inflation targeting and austerity in fiscal accounts beyond the election date.
Ms Rousseff believes in maintaining the previous administration’s economic policy and will continue to place importance on the three main economic pillars of stability. Her government will defend the operational autonomy of the central bank, acting in favour of a gradual decline in the inflation target, with public sector financing to banks and companies likely to hit a plateau.
The agenda of Mr Serra is broadly similar to that of the current government. In terms of fiscal policy, Serra has a stronger conviction about the need to curb rising expenditures, and would give more political leeway to do so. His government would probably view tight fiscal policy as a precondition to lower interest rates and for slowing appreciation of the currency.
There is also a risk that the autonomy of the central bank could be compromised under a Serra administration. He has repeated that he is not going to change economic policy and, indeed, he might have been responsible for creating the expression “economic pillars”. Thus, the market can see this as a calming influence.
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