Brazil is expected to be a major investment destination for global investors over the next decade according to Ashmore Investment Management, the leading specialist emerging markets asset manager. A largely closed economy with strong domestic demand, Brazil has weathered the credit crunch, is a net creditor country lending money to the IMF and should see benefits from global rebalancing.

Commenting on Brazil’s investment culture Eduardo Camara Lopes, chief executive officer of Ashmore Brasil, said: “Over the next ten years, and as domestic investors become more accustomed to lower interest rates than a decade ago, we will see more allocation outside money markets. A growing number of companies are looking for financing via the stock exchange. Credit availability is also growing and this has had a strong impact on the economy as a whole”.

An established local team based in São Paulo has enabled Ashmore Brasil to pursue the domestic opportunities in the region, where returns have been strong across both equities and debt. The Ashmore Brasil Equity Fund is up 137.42% versus 104.74% for the index.

Eduardo added: “Our equity approach combines top down and bottom up analysis, is long only, and has at least 80% highly liquid stocks. This compares to a number of more complicated hedge fund type strategies. The benefit of this approach is that it enables strong performance without the same liquidity and other downside risks of some competitor funds.

Jerome Booth, head of research at Ashmore, believes that Brazil remains attractive for international investors as the region should benefit from the impending global economic and political rebalancing.

He said: “After many years of constitutional and structural reforms, inflation has been decisively beaten and political risk has reduced. Whilst there is still a political cycle, as in most countries, there is a broad consensus on economic policy. Basic and sustainable fiscal prudence and macro-economic stability have been established.”

“As this new reality of global risks changes, so asset allocators are starting to realise they are massively under-weight Brazil and other emerging markets. Moreover, global investors who previously thought the US and Europe as safe-havens are having to reassess their own asset allocations, whilst institutional investors in Brazil are going to have to invest more in managed funds as the country moves to a permanently lower inflation growth path.”

By Julia Bushueva, strategist at Unicredit Securities
Last week’s decision by the Brazilian government to reintroduce a 2% tax on foreign investment in local stocks and bonds in order to prevent bubbles and cool down the market is likely to boost trading in Brazilian ADRs, we believe, but may divert cash to the Russian stock market, as well.

The two markets are among the best performers YTD (up over 100%), but Russia looks much cheaper than Brazil. We calculate that the RTS Index trades at a 2009E P/E of 10.2X and a 2010E P/E of 8.3X, which is about 40% less than the Brazilian average (30% using Thomson ONE data, 21% using Bloomberg).

The gap is wide in historical comparison. Russia traded roughly in line with Brazil from 2002 until the current financial downturn began. The average Russian discount to the Brazilian market for the last decade is 19%, well below the current level.

The discount remains even if we use Brazilian weights. Some believe that Russia’s discount to the Brazilian market on P/E may be explained by the RTS’ is heavy overweighting in oil and gas names (57%), while in Brazil’s Bovespa Index the heaviest sectors are metals and mining and banking, which traditionally trade with higher P/E multiples than oils.

Nevertheless, our calculations suggest that even after reweighting the RTS based on sectoral shares in the Bovespa, the Russian market trades at a discount of about 30% to its closest BRIC peer.

Russia’s GDP is weaker, but industrial output is down roughly as much as Brazil’s, and Russia’s earnings profile looks better. We believe the market may be missing the fact that, while on GDP Russia looks weaker (down 11% yoy in 1H09 vs. 1.1%, respectively) and the IMF forecasts a drop of 6.5% in 2009E and an increase of 1.5% in 2010E for Russia vs. a drop of 1.3% and a rise of 2.5% for Brazil, the countries’ industrial output profiles look about the same, as the charts below indicate.

Moreover, if we look at the earnings growth profiles of the companies in the RTS and the Bovespa, Russia looks stronger, with projected cumulative earnings growth in 2010E of 39% yoy vs. 24% for Brazil.

We thus believe that Russia’s relative cheapness may attract funds if investors start reallocating their positions due to the reintroduction of the tax, with commodity producers among the primary beneficiaries. We recommend Gazprom, Novatek, Uralkali Norilsk Nickel and Sistema.

By Jason Corcoran in Moscow

Emerging markets fund specialist Ashmore Investment Management is expanding its global footprint by opening offices in China and Japan and potentially in Russia.

A source close to Ashmore said it was already recruiting for an operation in China, along with a sales office in Japan.  A formal presence in Russia is expected to take shape at the end of this year or early in 2010, added the source.

Ashmore, which manages about $25bn, last year opened operations in Brazil and Turkey in a bid to increase its local presence in emerging markets, to raise more capital and to add more country focused funds. In 2007, Ashmore entered into a joint venture with private equity firm Alchemy Partners to invest in distressed debt and special opportunities in India.

Jerome Booth, head of research at Ashmore, declined to comment on specific geographical expansion plans. In an interview with Financial News, he said: “Our overall objective is underpinned on the need to grow and so far a lot of that has been organic in Brazil, Turkey and India. It’s a natural extension to build on further.”

Ashmore, which has traditionally raised most of its capital from US and European institutional investors, is attempting to raise money in emerging markets. Booth added: “We already manage money for central banks and sovereign wealth funds but eventually hope to have manage funds for small investors in emerging markets.”

Booth said the group had already succeeded in its primary goal of convincing US pension funds to be make significant allocations to emerging market devt. Overall, Booth said Western fund said be allocating 35-50% to emerging market investment classes.