BRAZIL: Stability brings hopes of growth

DOWN A fifth so far this year, Brazilian equities have been battered as much by the expectation that US interest rates will rise as anything else. But after more than doubling in 2003, there is still plenty of room for investors to take profit and wait for the next wave. "The country is a mixture of first and third world," says Philip Ehrmann, head of emerging market funds at Gartmore. "A lot of multinationals are present there, but also rural backwardness and patches of extreme poverty."

President Luiz Inacio Lula da Silva, elected 18 months ago, is widely credited with bringing stability and fiscal discipline. An ex- Marxist, with time spent in jail for his politics, Mr Silva has brought an unprecedented degree of political unity: the expectation is that this will bring greater economic stability.

Even so, the Brazilian market is very concentrated. The oil giant Petrobas accounts for 28 per cent of the stock market index, the iron- ore manufacturer CVRD for a further 17 per cent, and local telecom companies for another 10 per cent, a total of 55 per cent. "This makes the market inherently volatile," says Mr Ehrmann.

Large parts of the economy are not represented by public companies. Surprisingly for a developing country, power and water are privately owned. The government- controlled state pension fund also has decisive shareholdings in many domestic companies. And the government has a controlling share in Petrobas. Vast tracts of arable land and rainforest are in the hands of wealthy local elites.

Despite all this, Brazil manages GDP growth of 3 per cent to 3.5 per cent.

But, as always, the question for private investors is how best to get exposure to this market. The answer is likely to be one of a handful of Latin American funds or "BRIC" funds, playing Brazil with Russia, India and China. Providers include Gartmore and Aberdeen.

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