Infra investments develops Brazilian capital market

The investments in the Brazilian infrastructure sector might not only put the country’s economy on the growth path again, but also develop its capital market. Looking for ways to boost long-term private funding, the federal government has granted tax benefits to local and international investors for products linked to infrastructure projects. The receivables investment funds (known as FIDCs) are the new bet to increase the private funding in projects related to highways, railways, ports and airports.

To Ricardo Mizukawa, FIDCs committee coordinator at Brazilian Financial and Capital Markets Association (Anbima), the potential is huge due to the infrastructure investments needs in Brazil.

Brazil invested 2.2% of its GDP in infrastructure last year, and the government’s target is to reach 4% in the next three or four years, which means investments need to almost double in that period. 

Several recent changes have made this type of investment more appealing to foreign and local investors, and fund managers as well.

The Brazilian receivable investment funds are similar to other consumer loan securitization funds around the world. It is backed by trade receivables, credit cards, auto loans and other assets. FIDCs have often at least two classes of shares: senior and subordinated. The originator usually remains the subordinated class and it is responsible for taking on possible losses. The senior shares are offered to public investors.

Although FIDCs are not new in the Brazilian market, the legislator granted tax-exempt to receivable funds linked to infrastructure projects only at the end of 2012. According to Anbima, BRL 3.7bn (USD 1.5bn) are invested in infrastructure FIDCs of a total of BRL 213bn (USD 94bn) as a whole.

The assets that compromise the portfolios are generally acquired with a discount, which provides investors higher yields compared to other investments linked to interest rates. Besides that, as the portfolios usually contain receivables from a variety of debtors, the fund can be ranked higher than the company.

To have the tax benefit, the fund must be organized as a closed-end portfolio, and the originator or assignor of the receivables cannot be a financial institution. Before going to the market, the assets need approval from the government, and after the money is raised, it must be channeled into investment projects in infrastructure. The receivable investment funds must also pay fixed interest rates or be linked to a price index or even to a reference rate. Post-fixed interest rates are forbidden.

According to the legislation, if the sources are not allocated into the project, the receivable’s assignor will be fined 20% of the amount raised. The duration must be at least six years and the principal invested cannot be paid within the first two years from the close date of the offering.

A FIDC with multi assignors makes this product very attractive because it brings diversification to the portfolio and improves the portfolio’s rating.

Time to sift opportunities in Brazil’s infrastructure financial market

While the Brazilian government plans to attract private investors to its massive concession program in highways, railroads, ports, airports and high-speed rail (HSR), institutional investors have been looking for ways to invest in infrastructure. Although many of them prefer investing directly, there are some opportunities in the capital markets, either in bonds or even in the equities. Despite the recent volatility in the stock market, some brokers and analysts still believe long-term investors can find profitable investments in infrastructure companies listed in Brazil’s stock exchange (Bovespa), though it is necessary to sift them.

Bovespa index, highly concentrated in commodities companies, has been performing poorly this year — the benchmark has not closed a single month in the positive territory in this year. And the short-term international investors have been penalizing the market while the country’s economy continues to show signs of weakness. IPCA consumer price index rose 6.67% during the 12 months that ended in mid-June, above the government's inflation-targeting range of 2.5% to 6.5%. As a result, Brazil’s central bank was forced to raise its base interest rate for the first time in nearly two years. Infrastructure companies, however, have steady revenues as their contracts are adjusted annually by inflation, which makes their shares a good way of hedging.

The companies have a great level of future cash flows predictability, and the major risk is traffic volatility, though the Brazilian new car sales have been increasing. The traffic volume of light and heavy vehicles might remain strong and continue to grow above the country’s GDP in the next few years, several economists believe.

Despite the volatility in the stock market, there is no lack of appetite for infrastructure companies and investors have been showing lower pessimism in this sector.

CCR, EcoRodovias, Triunfo Participações and Arteris are the four companies listed in the Brazilian stock exchange, but the perspective to the companies varies. CCR, which is responsible for 2,437 kilometers of highways in the states of São Paulo, Rio de Janeiro and Paraná, is the preferred toll road stock among analysts.

UBS, for instance, is overweight in CCR’s shares, which are the top pick in the toll road sector. The company has R$ 7 billion (US$ 3.2 billion) to invest in new projects. The largest concession controlled by CCR is Autoban, considered one of the best roads in Brazil in terms of quality. 

CCR has been diversifying its business, investing not just in highways but in other ways of transportation, which is positive. In April, a consortium called VLT Carioca and formed by CCR, Invepar, Odebrecht, TransPort and RioPar Participações won the PPP contract to build a 28km-rail-transit (LRT) in Rio de Janeiro and operate it for 25 years.  

Political risk
Brazil’s regulatory environment for toll road operators has been transparent, but not fully independent of political interference. After weeks of protests focused on the high cost of transportation, Brazil’s largest state of São Paulo decided to freeze all highway toll fares until July 2014. The state suspended the toll increase of as much as 6.5 percent that was set to take effect on July 1 and froze fines for delays in construction and fees it charged from the companies to compensate the scrapped increases in fares.

The cancellation in the toll adjustment will be possible due to a reduction in the revenue charged by São Paulo State Transportation Concession Authority (Artesp), the state transportation regulatory agency, from 3% to 1.5%. The total cost for the government will be BRL 400m (USD 182m) in 2013. 

At first sight, it seemed the São Paulo state government was breaching contracts, but it is not, because there is a compensation for possible losses

Infrastructure is the major constraint on BRICs

Infrastructure bottleneck is still the major problem that jeopardizes the growth path in the BRIC’s (Brazil, Russia, India and China) economies. This is shown in a study by Grant Thornton’s International Business Report (IBR) with more than 12,500 businesses across 44 economies. According to the research, business leaders in the fast-growing BRIC economies believe the infrastructure is the major constraint on their ability to grow. Besides, the numbers reveal that for the first time, the top five most optimistic economies do not include the BRIC nations. The study does not place South Africa as part of the major emerging markets group.

To 45% of BRIC businesses, transport infrastructure is the major motive on their ability to grow, up from 21% last year. The data is also higher comparing to the global average of just 12%. The figure is particularly high in Russia (74%) and India (59%). In Brazil, 25% of the business leaders are dissatisfied with the quality of local transport infrastructure, a change from the 21% last year. It is important to note that the largest Latin America country will host the next FIFA World Cup, in 2014, and Summer Olympic Games, in 2016. In China, poor transportation was cited as a problem by 22% of the businesses.

Besides transportation, Information and Communication Technology (ITC) are considered a growth constraint. Addording to the research, 47% of the BRIC businesses cited ICT infrastructure as a bottleneck, a dramatic increase from the 19% figure recorded 12 months ago and the global average of just 14%. Again, India (64%) and Russia (63%) are the most concerned. ICT infrastructure is a bottleneck to be solved by 36% of the Brazilian business leaders, while it is 28% to the Chinese ones. 

To Ed Nusbaum, Global CEO of Grant Thornton, growth in the BRIC economies over the past decade has been incredible, with the four economies accounting for more than 30% of global economic growth since 2002. “However, the IBR results reveal that they are now facing capacity issues. Investment in infrastructure appears to have lagged behind growth, leaving unsatisfied business demand for better connectivity, says.

"The BRIC share of global economic growth is set to rise to 37% over the next five years, so these connectivity issues represent a major risk not just for the individual economies but the world as a whole."

When measured on a per capita basis, the GDP of the BRICs economies is behind that of the G7, but the major emerging markets are catching up fast. The BRICs forecast is to account for 37% of global growth in the period 2011-16, with China alone contributing 22%. This will increase the BRIC share of global production from 19% to 23%. Meanwhile, the proportion of global output produced by the traditional powerhouses in the G7 economies will fall from 48% to 44% over the same period.

The research also reveals that no BRIC economy makes it into the top five for business optimism for the first time in Q1-2013. Top of the list is Peru, followed by the Philippines, United Arab Emirates, Mexico and Chile.

In the Nusbaum’s opinion, investment in infrastructure is a sign that governments are serious about facilitating business growth. “This in turn breeds confidence (…) BRIC infrastructure concerns highlighted in the research are not temporary blips. They represent long-term problems which need to be addressed if growth is to be maintained in the coming years”, says. ““However, whilst the BRIC economies overcome their growing pains, the next wave of emerging markets – such as rapidly reforming Mexico and the other rising Latin American stars, Peru and Chile –  look ready to take up the mantle. There is no doubt that holes in output left by the BRICs offer opportunities for these frontier economies.”

The data was collected between January and February 2013. In total, 375 interviews were conducted with BRIC businesses.

China and Brazil Sign Currency Swap Agreement

China and Brazil have signed an agreement to trade their own currency to the equivalent of up to US$ 30 billion per year. The swap will take almost half of their trade exchanges out of the U.S. dollar zone. The deal confirms that the two countries are working together to lessen their dependence on the volatility of the American dollar and euro. The currency agreementl was announced before the start of the BRICS summit (Brazil, Russia, India, China and South Africa) in Durban, South Africa, today.

The trade between the two countries totalized around $75 billion in 2012. Brazilian officials have said they hope to have the trade and currency deal operating in the second half of 2013. According to the agreement, the respective currencies will be deposited in a special bank account without access to credit or remuneration.

According to Alexandre Tombini, the Brazilian Central Bank Governor, the idea is not to establish new relations with China, but rather expand relations in the case of turbulence in financial markets. “The swap won’t affect Brazil’s reserves because it’s in local currency,” he said, emphasizing it won’t affect current trade financing.

As the euro crisis continues on the spotlight and the West shows little signs of growth, the World Bank says the global economic growth is increasingly dependent on the BRICS countries. The five nations are responsible for 27% of global purchasing power and 45% of the world’s workforce.

BRICS development bank takes shape

The BRICS development bank is starting to take shape. Brazil, Russia, India, China and South Africa will each make an initial capital injection of $10 billion to fund the bank, which means the bank will start out with US$ 50 billion in capital. The idea is to establish a joint bank to provide funding for infrastructure projects and sustainable development in the five countries and even for other emerging markets and developing countries.

The development bank will lend to private and public companies in order to make sure more people will benefit from the bank’s capital. Governments outside the BRICS group can also be favored if they propose social or green projects (biofuel, for instance). Even nuclear power plants might receive money, a kind of project the World Bank does not fund due to social and environmental issues. Currently, 50 of the 66 nuclear reactors under construction are in the BRICS countries.

The new development bank wants to be an alternate lender to the World Bank and other finance bodies. The five nations have been struggling to change their role in the World Bank and in the International Monetary Fund (IMF). The BRICS countries have been important borrowers from the World Bank and they also have been increasing their contribution to IMF. The five nations want the IMF to reform its quota system to enhance their representation. The current voting policy in IMF does not reflect, for instance, the enormous changes in the global economy over the past few decades. The new development bank, therefore, might provide a bargaining power.

After a disappointing performance last year, the BRICS countries can make investors happy again in 2013. Last week, David Hauner, head of fixed-income strategy for emerging Europe, the Middle East and Africa in Bank of America Merrill Lynch, said investors should buy the BRICS bonds and equities this year. “What we’re saying about emerging markets is that the BRICs are back,” said in an interview in Abu Dhabi. “Last year a lot of people were saying that the BRICs are finished and of course we had disappointing growth in all of them. Now this year we see a recovery.”

According to Hauner, emerging markets are expected to record economic growth of 5.2% this year compared to 4.9% in 2012. The BRICS countries might be on the spotlight and, again, China might present the best growth rate. “Our own global asset allocation suggests that you should be overweight equities, overweight emerging market bonds, should be overweight high yield.”

Globally, however, the International Monetary Fund (IMF) continues to expect a modest economic growth of 3.5% in 2013. Within the BRICS countries, Brazil growth might disappoint again. The largest economy in Latin America might grow 3.5%, a better rate just comparing to South Africa (2.8%). China growth rate might reach 8.2%, followed by India (5.9%) and Russia (3.7%).

If emerging markets are currently not the global engine, who is?

After a year of disappointing economic growth rates in emerging markets, many economists are saying that these countries, especially the major ones—Brazil, Russia, India, China and South Africa (BRICS)—have faded as an engine of global recovery. According to some analysts, the emerging countries, except for China, have been struggling to grow and have been facing inflationary pressures. Although it is true to some point, this theory arouses as well an instigating question: if the emerging markets have faded as the global engine, who has been keeping with the global growth? Is it the U.S economy? Or  the eurozone? The answer is: the emerging markets.

The eurozone sovereign debt crisis seems to be under control, though this scenario can change anytime. The European group might have another year of low growth rates in 2013 associated with high unemployment figures, especially in Spain. And this is a problem that the policymakers do not solve rapidly. The Spanish government—as the Portuguese, Greek and Italian ones—will have to cut costs and social benefits, which means less money will be injected into the local economies. Thus, the eurozone might have another year of weak growth.

In the United States, the unemployment rates remain persistent and the U.S. debt problems are critical. “From my vantage point, the uncertainties surrounding the U.S. economy may just be the tip of the iceberg, threatening the global economy in the coming year,” wrote Mark Mobius, who directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios.

Indeed, the problems over the US budget could restrain the economic growth around the world. According to the World Bank, “the US may fall into recession, posing a greater threat to the world economy than the euro zone crisis which is expected to continue in 2013,” said the institution on its n its Global Economic Prospects report.  The World Bank also said the US economy might grow 1.9% in 2013 due to "fiscal paralysis". The American Congress has to approve the US sovereign debt ceiling above the current USD 16.4-trillion mark.

On the other hand, the emerging markets have been growing at lower rates compared to some years ago, but in general they are still growing more than the developed markets. According to some analysts, the global emerging markets’ GDP might grow 5.1% in 2013 from 4.5% in 2012. China, for instance, might grow 8.1%, which means this will support growth for export-oriented companies in the emerging markets.

According to Mobius, Frankling Templeton’s research team is still generally positive on the long-term prospects for emerging and frontier market equities. “In our opinion, the economic background for many emerging and frontier markets is stronger than that prevailing in many developed markets,” Mobius wrote on his blog. “Although weak growth in developed markets could be transmitted to emerging markets, notably through declines in world trade, this influence could continue to be offset in emerging markets by higher investment spending and increased domestic demand.”

Another important point is that the emerging markets still have room for implementing fiscal and monetary policy. Yesterday, for instance, Brazil’s monetary authority decided to keep the annual basic interest rate in 7.25%—although this is the lowest level ever, the country has ample room to cut this interest rate

According to Mobius, the Chinese economy will have a stronger performance in 2013 compared to 2012. “The authorities will continue to reposition the Chinese economy to depend less on export and investment spending and more on domestic demand.

“We believe that the strong prospects for growth in many emerging markets are not currently recognized in equity valuations,” said the executive. To Mobius, two particular investment themes stand out to: consumers and commodities. “The consumer theme arises from consumers in many emerging markets becoming increasingly wealthy (…) the commodity theme reflects our expectation for strong growth in demand for hard and soft commodities as many emerging markets industrialize, likely grow wealthier and increase spending on infrastructure.”

Emerging multimillionaires

The number of multimillionaires in the major emerging markets will boom 76% growth by 2016. According to a report elaborated by WealthInsight—a British consulting company which provides data about the wealth sector—, the BRICS countries (acronym for Brazil, Russia, India, China and South Africa) are quickly gaining people with at least $30 million in their bank accounts, and Beijing and Shanghai have, each one, more millionaires than Los Angeles.

The study is focused on the so-called ultra-high net worth individuals, which means people with $30 million or more. The study shows that Beijing has 1,318 high net worth individuals, while Shanghai has 1,028. On the other hand, Los Angeles has 950 people with at least $30 million. New York city, however, remains the place with the most ultra-high net worth individuals: 2,929.

While Beijing is the largest BRICS’ city for multimillionaires, São Paulo, in Brazil, occupies second place, with 1,310 high net worth individuals, which means that there are more multimillionaires in São Paulo than in San Francisco, Washington and Miami together. In the third place is Shanghai (see the table above).

According to the report, Moscow has 821 high net worth individuals, which means the Russian capital has even more multimillionaires than Chicago, while Mumbai (with 577 individuals) surpasses Dallas.

And the growth rate will continue to increase fast in the BRICS countries. According to WealthInsight, in India, the multimillionaire population will more than double by 2014, reaching 511,000. China is in the second place: the number of high net worth individuals might grow 82%, while in Brazil the number will increase by 40%.

The report covered 30 cities in total. On the list, China has 12 cities within the 30 largest, while Brazil has nine. India, by its turn, has five cities and Russia, two. South Africa has also two cities. According to the report, at the end of last year, there were 1.9 million high net worth individuals in the BRICS countries, with combined wealth of $7.5 trillion.


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