Fund managers love Brazil, see equities growth

Diane Garnick, an Investment Strategist at Invesco Ltd., speaks at the Reuters Global Media Summit in New York, December 9, 2009.

NEW YORK (Reuters) - Blame it on fundamentals.

Top money managers and strategists at the Reuters Investment Outlook Summit in New York have a short answer for where they want to put clients cash outside of the developed markets.

"I love Brazil," Diane Garnick, investment strategist at Invesco, said on Wednesday.

Garnick and other top money managers at the summit this week said Brazil is an enticing investment because the country -- whose financial markets withstood the extreme fallout from the global financial crisis -- continues to exhibit strong fundamentals such as a rising middle class, and under-developed industries with plenty of room to grow.

"For example, less than 20 percent of the population uses the financial services system. They don't even have a bank account, so that in my mind creates a scenario where they are going to grow a lot faster," she said.

Bill Gross, co-chief investment officer at Pacific Investment Management Co, the world's biggest bond fund, said investors should look at economies with low levels of domestic consumption as a percentage of gross domestic product like Brazil and China for equity investment returns above 4 or 5 percent.

"These are economies that can grow and grow and grow," Gross told the Reuters Summit.

Brazil's benchmark stock index, the Bovespa .BVSP, even after rising nearly 80 percent this year, still has a 12-month forward price/earnings ratio below that of the U.S. benchmark Standard & Poor's 500 stock index .SPX, 13.4 versus 14.9, according to Thomson Reuters data.

Mary Miller, the head of fixed income at Baltimore-based T. Rowe Price, said there are good opportunities in countries that did not have the same kind of market meltdown as in the developed markets, which are exhibiting strong fundamentals and are now experiencing economic recovery.

"We've been investing in Brazil," she said.

The diversified economy, with a mixture of manufacturing and the exports of raw materials to China, supports fund managers' positive outlook.

But it has also spurred huge demand for Brazil's currency as investors pile into investments.

The currency, the real, is up 31.6 percent against the U.S. dollar, driven, at least in part, by a benchmark interest rate at 8.75 percent versus nearly zero percent in the United States and Japan.

The government, in an effort to control the huge appreciation in the real, slapped a 2 percent tax on capital inflows into stock and fixed-income markets.

THE NEXT DEVELOPED NATION?

Bob Doll, who oversees about $390 billion in assets as global chief investment officer of equities at BlackRock Inc., says Brazil is a standout among the other BRIC nations -- Russia, India and China -- because of how developed it is.

"I think it's for real. If there's a candidate of the BRIC countries to enter the developed world, it is Brazil," he said.

Doll cited Brazil's growing middle class in a diversified economy with a reasonably stable political system, where inflation continues to fall along with interest rates.

He said price-to-earnings ratios can go higher and earnings growth at Brazilian companies "is pretty good. So that's a combination that is pretty attractive for us."

On Wednesday Brazilian Finance Minister Guido Mantega said annualized economic growth should reach 8 percent in the fourth quarter of this year as capital spending recovers and consumer demand keeps pace.

"Is Brazil an important part of today's mainstream world? Absolutely. And it will continue to become so," said Max Darnell, chief investment officer at Pasadena, California-based First Quadrant.

NOT SO FAST

There are, however, cautionary notes on Brazil.

Standard & Poor's warned Brazil on Tuesday that its lax fiscal policy poses the main risk to its newly garnered investment-grade rating of BBB-minus.

And Nobel-Prize winning economist Paul Krugman said in a media briefing last week in Sao Paulo that he was "rethinking" his exposure to Brazil.

Krugman, who sees himself as a cautious investor, warned that markets are pricing assets in the country as if it would become an "economic superpower" by the next year -- which he does not believe is not going to happen at all.

(Additional reporting by Herbert Lash, Emily Flitter, Steven C. Johnson, Walter Brandimarte, John Parry in New York, and Silvio Cascione in Sao Paulo; Editing by Leslie Adler)