The stellar performance has been achieved despite nearly three years of political stasis following the impeachment of former president Dilma Rousseff in August 2016.
In fact, central bank figures showed that foreign investors withdrew $4.3bn from Brazilian stocks in 2018, the most in a decade, according to a Reuters report.
However, investors have been seduced by the plans of the government of new president Jair Bolsonaro and his market-friendly economy minister Paulo Guedes to increase Brazil’s economic competitiveness through a mixture of tax cuts, privatization and pension reform.
The MSCI Brazil index rose nearly 20% in the first month of this year, before losing some of its shine in February.
Funds vs index
The HSBC GIF Brazil Equity Fund has posted an 85.1% three-year cumulative return by more-or-less matching the Brazil index, but has achieved an alpha of 5.62 over the broader MSCI Latin America Index, according to FE.
In comparison, the Alquity Latin America Fund has earned a three-year return of only 17.56%. Its 3% OCF is also in sharp contrast to the 0.3% charged by the HSBC fund.
Volatility is higher for the Brazil funds, but the information ratios for the three leaders (which include a Brazil index tracker) is far better than the three diversified Latin America funds (see table).
The MSCI EM Latin America Index has a 62% weighting to Brazil, and its next largest allocation is Mexico with 21.8%.
However, Mexico’s market performance has been flat for most of the past three years, and suffered a sharp fall in the final quarter of 2018 in the wake of some controversial policy statements by the country’s new leftist president.
The MSCI Mexico Index has a negative three-year cumulative return (-8.27%).
The Mexican bourse trades on a price-to-earnings ratio of 15.45, compared with an 18.87 multiple for the Brazil market, according to Bloomberg data, so at current valuations Mexico looks better value.
However, as Morningstar pointed out in a report at the start of this year, the policy decisions by the two countries’ new populist governments are likely to be more compelling factors for relative market performance.
The top and bottom 3 Latin American funds
3-year cumulative return %
Annualised volatility %
HSBC GIF Brazil Equity
Xtrackers MSCI Brazil Ucits ETF
Parvest Equity Brazil Privilege
MSCI EM Latin America Index
Alquity Latin America
MFS Meridian Latin American Equity
Invesco Latin American Equity
Source: FE Analytics. SFC-registered fund universe, in US dollars, 5 March 2016 – 1 March 2019. The MSCI EM Latin America Index is included for reference only.
HSBC GIF Brazil Equity Fund vs Alquity Latin American Fund