Global markets are marching forward but finding the best opportunities sometimes requires breaking away from the crowd. Raj Dhaliwal asked five advisors for their top contrarian calls for the rest of the year.
Buenos Aires, Argentina
Latin America has been out of favor due to poor fiscal initiatives introduced during the Covid-19 lockdowns, the slow pace of vaccinations, and the social unrest and political uncertainty gripping the region. However, we believe that there is value in Brazilian bonds and equities.
We see little room for downside. The Brazilian central bank has proven its independence by hiking interest rates that are expected to reach 5.5% next year to control inflation. This move has stabilized the currency and financial assets. The fiscal deficit is high (7.5% of GDP expected this year) but foreign debt is very low, the central bank’s reserves are high (24% of GDP), and the domestic capital market is strong.
We see potential upside in Brazil’s 2021 GDP growth – forecasts are at 3.6% – and valuations are attractive. The increase in US Treasury yields resulted in sovereign bond spreads widening. The 10-year bond climbed 120 basis points to 4.4%, and although it recovered to 3.8%, it can still compress to previous lows of 3.2% as vaccinations accelerate. We also took advantage of opportunities in corporate bonds.
In terms of the country’s equity market, Brazil has a strong correlation with commodities, as materials represent 36% of the index. Also, financials (16% of the index) will benefit from an increase in interest rates and expected loans growth. In terms of valuation, it is trading at a low 12-month forward PE of 10x with expectations that earnings will double from a very low base.
The risk is political, with Lula da Silva most likely being allowed to run in next year’s Brazilian presidential election. However, with that event being almost 18 months away, we believe that the current administration can improve its image if the economic recovery and pace of vaccinations accelerate.
Chief investment officer
Blockchain, baby! 2020 was a year that left us with an important consideration – we can’t live without the digital world and the industry is attractive. What is going on in 2021? We know that nothing lasts forever, especially when it comes to expectations and prices, so the question is how much are we willing to pay for this growth? Given the catalysts of this new growth, we can conclude that certain technologies are here to stay. Technology is the basis from which you build a new era, and in terms of information, digitalization (cloud services), and decentralized security of information, blockchain is the most important. All the tech developments nowadays converge into building a more secure, efficient, fast, and stable internet.
It’s hard to value an industry that has little history and comparison. It’s even harder given we have never been so advanced in our evolution and we are still fighting a pandemic – a very complex setting to spot new trends. But blockchain is a game-changer: it can provide a safe, stable, decentralized and fast network. We are faced with something new but that has been in the works for the past 20 years. We are experiencing new consumer behavior that is hard to see and makes us look at the blockchain industry with a traditional view. We need to evolve with technology.
Allaria Ledesma & Cia Bank
Buenos Aires, Argentina
If I had to play a contrarian card, I would say that inflation is going to be a bigger problem than expected. Long durations and high-debt companies will clearly be a headache.
In this context, I would look for ideas in the short section of the fixed income curve, especially those sectors that have not yet experienced central bank intervention through their expansionary policies. In equity, value companies would benefit from this situation, although I also believe that the mining sector presents great opportunity to capture value.
In fixed income, I would position myself within the American MBS market, the second-largest fixed income market after T-Bills. Here, I would look for instruments of high quality, liquidity, and very short duration – seeking to preserve capital from risk duration, while accruing an interesting yield. Funds such as GAM Star MBS Total Return are an interesting option in this context.
Within equities, following the assumption that the rate of inflation will accelerate, the mining industry, particularly linked to gold, is undoubtedly a top play. Funds such as Ninety One Global Gold, where medium-sized companies are combined on average with a strong ESG bias, would be my recommendation.
Investment products analyst
This environment allowed us to re-think the way we impact the world through finance and thus shift our objectives and reorient our allocation towards responsible investing. The sustainability approach is a new mindset we are applying across the whole investment process, from selection to engagement, to turn sustainable strategies into well-established structural positions in our Latin American client portfolios.
Talking about long-term winners, one of the themes we like most is innovation. Innovation tends to benefit from secular growth trends and exploits the best opportunities in this ever-evolving world where great ideas boost the creation of wealth across all sectors of the economy. But is it too expensive? No, because the future arrives earlier than expected – its value is not fully reflected in market prices since investors underestimate how quickly a new product or service will be adopted in the global market.
On the other hand, our focus on sustainable investing goes beyond ESG integration. We are looking for managers that go one step further and aim to invest in companies with innovative solutions that materially contribute to solving the world’s major environmental and social problems while potentially achieving consistent and superior returns.
To reflect both strategies, we recommend the Franklin Innovation and Wellington Impact funds.
Oscar Mauricio López
Head of global markets
Casa de Bolsa
The best thing we did was stick to the process and to the core-satellite asset allocation that we promote. We have been expanding our offering with strategies in secular growth trends. This type of investment can still offer attractive value in terms of forward-valuation metrics and it´s crucial to identify companies that can reinvest capital to maintain growth through an uncertain economy.
Multi-asset funds can be an all-weather proposition that may be suitable for all market conditions and may work across and through market cycles. Some multi-asset allocation strategies could be deemed suitable for investors who have a medium-risk appetite but want to enjoy steady returns.