Brazil: Temer On Trial, Will Consumer Visit Malls?

Brazil: Temer On Trial, Will Consumer Visit Malls?

EMERGING MARKETS DAILY Brazil: Temer On Trial, Will Consumer Visit Malls?

Brazil’s president is under fire, but Morgan Stanley hope springs eternal for Brazil’s consumer and some shopping malls.
ByDimitra DeFotis June 6, 2017 10:59 a.m. ET
A court in Brazil begins deliberations today on allegations that President Michel Temer used illicit funds in his 2014 election campaign.

A decision could take weeks or longer, and Temer would likely appeal a negative result. But the electoral court decision could force Temer — and his economic reform agenda — from office, The New York Times reports.

The iShares MSCI Brazil Capped exchange-traded fund (EWZ) was up 0.6% in recent trading, but is down more than 7% over the past four weeks. Shares of mining giant Vale (VALE) were up 1.6% in recent trading, and are up 0.6% over four weeks. Shares of state-controlled oil producer Petroleo Brasileiro or Petrobras (PBR) were down 0.8%.

But the economy may not come to a stand still. Morgan Stanley analysts Nikolaj Lippmann and Jorel Guilloty said in a note Tuesday that they still like Brazilian malls, with an overweight rating on Iguatemi Empresa de Shopping Centers (IGTA3.Brazil) and an upgrade of BR Malls Participacoes (BRMSY) to overweight. Neither trades with an American depositary receipt, but BR Malls trades over the counter. They write:

” … Both names are self-help stories, with material embedded growth at a discount to U.S. peers. We see Iguatemi as farther along the restructuring cycle, with growth nearer term yet see an opportunity in BR Malls as well as the company restructures operations … Brazil offers compelling demographic tailwinds … We estimate that even with zero growth per capita, demographics alone can add 200-300 basis points to mall revenue (real) per year. While the internet will take some of the growth, we view Iguatemi and BR Malls as making the right moves, focusing on differentiated content (stores and other mall features). We forecast U.S. dollar earnings before interest, taxes, depreciation and amortization (Ebitda) growth of 54% for Iguatemi and 24% for BR Malls in 2016-2019 estimated versus the 10% U.S. mall REIT average; the stocks trade at discounts of 33% and 31%, respectively, to US peers on 2019e Ebitda multiples …
Iguatemi remains our preferred pick in Brazil. Our R$40 price target (+5% higher) implies +26% upside. IGTA is part of the Morgan Stanley Latin America model portfolio. …”
One tiny fund trying to capitalize on real estate trends in the region: the $2.9 million Tierra XP Latin America Real Estate ETF (LARE), which is up 21% in 2017, while the iShares MSCI Latin America 40 ETF (ILF), with assets of $1 billion, is up 11%.


See our posts Brazil Roundup: Rate Cut to 10.25%, Moody’s Slashes Bank Outlook and Petrobras CEO Wants Continuity In Brazil’s Political Storm.

Pru Real Estate Cranks Up The PR Machine, but why?

Prudential Global Investment Management (PGIM) has a terrific platform – professional, transparent, proven track record & diversified. A couple years back, we performed a deep analysis of their Mexico platform for a leading sovereign wealth fund in connection with a follow-on fund. We came away very impressed overall.

We were intrigued to see this recent piece – Where Smart RE Investors Are Putting Capital in Latin America – sponsored by PGIM, that suggests they’re seeing increased interest from global LPs in the LatAm real estate asset class. It’s a good discussion and they make some interesting observations, including the challenges facing multi-family housing, residential development in Mexico, compelling risk-reward in Brazil and, drum roll, the rise of local institutional capital.

First, Pru is spot regarding Mexico housing. Many are aware that this segment crashed and burned with the heat of a flaming habanero pepper a few years back when the newly installed Pena Nieto government announced a sweeping restructuring of Mexico’s housing subsidy program, the changes of which rendered builders’ land reserves essentially worthless and over-indebtedness pushed most of public home builders into bankruptcy. What we saw over the next year was a series of high profile defaults, shareholders lost everything and the industry ground to a halt. Housing was really the only real estate segment that went through a distressed period since the 2008 peak – and it all happened in the public markets.

As Pru points out, Mexico’s housing industry totally recapitalized and, again, is positioned to take advantage of the favorable long term demographic opportunity. Notably, Sam Zell got back into Homex last year after having invested in & exited the builder nearly 10 years ago, and he’s doing it all through the public equity. And that is the conclusion that Pru leaves out – you can get exposure to the space through the half dozen or so public companies and in fact that’s what the shrewd managers, like Zell, are doing. But why you ask? Because private equity returns have converged with public equities.

This brings us to the next theme that Pru discussed – the rise of local capital. We’ve been writing about this for the last several years and, indeed, was a major impetus for our launching the Solactive Latin America Real Estate Index. The new era of real estate investing in Latin America is not on the private side but through listed equities, driven by local capital. Pru openly admits that local capital is willing to take lower returns but suggests that the shift hasn’t really happened yet. We beg to differ. The shift has been happening for the last five years and we see it everyday in the projected returns of direct investment deals in the region. Private returns aren’t going to generate any material benefit to the investor and, in reality, may even underperform as a result of high fees. Overlay the fact that locking up your capital has an opportunity cost associated with it, and the underwhelming proposition of going direct versus the public strategy becomes even more stark.

And this brings us back to the question of why is Pru cranking up the PR machine? Our suspicion is they’re likely sniffing out interest from LPs in a new fund but not the cookie cutter global fund where target LPs are US and Canadian pensions. Our guess? They’re looking at locally-listed funds with a regional (vs. country) focus. The piece is less about CalPERs than it is about local pension funds….

With US REITs Overextended, Consider this Latin America Real Estate ETF

With US REITs Overextended, Consider this Latin America Real Estate ETF

With U.S. REITs Overextended, Consider This Latin America Real Estate ETF

With attractive REIT opportunities drying up in the U.S., the time is ripe for investors to look overseas, particularly in Latin America, for ETFs providing exposure to emerging market real estate.

These high-yielding, attractively-valued assets are also slated to experience meaningful appreciation given a flurry of tailwinds expected to impact their respective countries. But before we get into why this space presents such a compelling opportunity, we need to take a closer look at the real estate picture here at home.

U.S. REITs Overextended

Real estate investment trusts (REITs) have experienced a sharp rise in demand as a result of their attractive dividend yields and the general appreciation of real estate values over the last five years. Investors have done well to jump on the REIT train with annualized appreciation that has outpaced overall equity returns. However, as the Federal Reserve moves closer to the next Fed Funds interest rate hike against a backdrop of historically high valuations for income-producing real estate in the U.S., are we nearing an inflection point?

Real estate was reclassified last August into its own sector under the Global Industry Classification Standard. With REITs and real estate operating companies no longer grouped into the broad Financials Sector, investors can now properly benchmark companies as well as funds and different industries.

The sector change was long overdue for the $1 trillion REIT category, however, investors must now grapple with the fact that U.S. REIT valuations are at historic highs and are increasingly sensitive to expectations surrounding U.S. rate increases. For example, the widely tracked MSCI U.S. REIT Index fell as much as 5.5 percent when investors fretted over the chance of a Fed rate increase at the September Federal Open Market Committee meeting. But when the committee elected to not raise rates, U.S. REITs promptly recovered nearly all of those losses in the following week.

Given their close tie to U.S. rate policy, the value of U.S. REITs will likely fall when interest rates eventually rise. The good news is we do not necessarily believe investors are going to lose money on a total return basis since the pace of rate hikes is expected to occur over years, not months. However, further appreciation is likely capped and the prospect for dividend growth appears very limited.

Like bonds, many experts believe U.S. REITs are priced for perfection as a result of investor demand for yield, the lack of “risk-free” investment choices and limited global economic growth. Real estate historically has provided investors with both income and appreciation potential. Income is a function of rents, and appreciation is a function of both economic growth and interest rates. In an expansionary economy where growth is robust, the impact of rising interest rates may be offset by strong growth and higher rental rates. But in a low-growth economy, the impact of interest rates is amplified.

What does this mean for the investor who values the predictable income associated with REITs and real estate in general? Does ridding the sector from your portfolio make sense given the current macro environment and medium-term expectation for interest rate changes? We believe the answer is no.

Emerging Market REITs to the Rescue

Real estate is an important low beta source of attractive risk-adjusted yield. But, like a bond portfolio, real estate exposure should be balanced between developed and emerging market (“EM”) real estate, a market which remains in growth mode on the back of favorable demographics and attractive valuations.

U.S. REITs are anything but cheap. The top 10 largest U.S. REITs, with a total market capitalization of nearly $300 billion, currently trade at an average price-to-earnings multiple of 33x, compared to the S&P 500 which trades at 24x earnings. On a price-to-sales basis, the top 10 U.S. REITs trade at an average of 10x sales and 4.5x price-to-tangible book value. Like bonds, the quest for yield has stretched U.S. REITs to historically high premiums over the broader equity market.

On the other hand, EM real estate, Latin America in particular, remains attractively discounted and offers dividend yields that are often superior to U.S. REITs. Notably, interest rates in Brazil are at 10-year highs with REITs yielding 10 percent or more, and many experts believe the central bank will begin cutting interest rates by the end of 2016. If this happens, real estate values will likely rise. Brazilian REITs are cheap, trading at less than book value and price-to-earnings multiples of around 12x, which is in line with the broader local equity market. Mexico REITs also offer attractive dividend yields in the 5 to 7 percent range and trade at roughly 15x price-to-earnings and 0.85x book value.

Apart from the impact of rising U.S. interest rates on domestic REITs, investors should pay close attention to their revenue growth. Analysts expect the top 10 U.S. REITs to see a decline in revenue over the next 12 months. On this factor alone, we believe diversifying into Latin American real estate is warranted. In contrast, Latin American REITs are expected to grow revenue by nearly 30 percent in 2017.

When we launched the Tierra XP Latin America Real Estate ETF (LARE) last December, one of the main goals was to provide investors with diversified access to this expanding asset class. In addition to the inherent benefits of diversification, balance and transparency, the LARE ETF seeks to maximize dividend yield and growth potential by tracking the Solactive Latin America Real Estate Index (LAREPR). LAREPR contains more than 60 components from Mexico, Brazil, Argentina and Chile. Our 20 years of experience working in real estate private equity in the region taught us that regional diversification, combined with the above average yields associated with real estate, is an excellent way to compound capital.

But Latin American real estate isn’t just cheap and high-yielding; it is an excellent risk mitigation tool for broader EM exposure as well. Based on our analysis, the LARE Index exhibits lower volatility than the broad MSCI Emerging Markets Index and significantly less volatility than Brazil and Mexico. Finally, the LARE Index is tracking a dividend yield north of 5 percent on a forward basis which is more than 3x the projected dividend yield for many EM indexes that serve as reference for widely owned EM ETFs.

One potential strategy an investor could employ is to add exposure to the Latin American real estate sector via the convenience of a U.S.-listed ETF to an existing U.S. REIT allocation. The resulting impact would increase exposure to growth potential, diversify sources of dividend yield and offset any potential pullback in U.S. REIT values, without adding unreasonable risk to the overall portfolio.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Yahoo Finance – Sep 2016

Run, Don’t Walk To This Latin America ETF

The Tierra XP Latin America Real Estate ETF (NYSE: LARE) has been highlighted a couple of times in this space recently and with good reason. LARE is either the best-performing real estate exchange-traded fund you’ve never heard of, the best-performing Latin America ETF you’ve never heard of, or both.

Lovely LARE

LARE is up more than 23 percent year-to-date, more than double the returns offered by the largest U.S.-focused ETF holding real estate investment trusts (REITs). Remember, it has been the Federal Reserve’s lower for longer interest rate policy that is acting as a primary catalyst behind the rise of REIT stocks and ETFs this year.

Sure, real estate stocks and ETFs are getting increased attention ahead of the move, happening at the end of this month, that will see the group depart the financial services sector and become the 11th GICS sector. However, that is a phenomenon many market participants are looking at through a U.S. lens. Of course, resurgent Brazilian equity markets are helping, but much of that is attributable to rebounding commodities prices and regime change.

So, if one applies the interest rate logic used on U.S. REIT ETFs to LARE, the Latin America real estate ETF becomes all the more compelling. The reason being is that Brazil is, finally, poised to start lowering interest rates.

Brazilian Influence

Brazil, Latin America’s largest economy, is home to some of the world’s highest borrowing costs at 14.25 percent. That implies plenty of room for rate cutting and that is good news for LARE, which allocates 52 percent of its weight to Brazilian real estate stocks.

The idea of Brazil’s selic rate falling is not fanciful, particularly if inflation data cooperates. Good news for LARE: Brazilian inflation data is doing just that. In fact, for the first time in seven years, Brazil’s inflation rate is set to meet the central’s bank target, potentially setting the stage for a rate cut that could lift LARE.

“Yields on Brazil’s interest rate futures indicate a probability of 78 percent that the bank will cut rates by 25 basis points at its Oct. 18–19 meeting,” according to Reuters.

Additional rate cuts could follow as Brazil’s economy is expected to modestly expand next year after contracting this year.

TheStreet – Sep 2016

Why is Latin America the Next Hot Investment?  What makes Latin America, an area rife with political uncertainty and economic concerns, such a hot investment space? It’s all about timing.   Chris Ciaccia Follow Sep 27, 2016 4:21 PM EDT Latin America has experienced tremendous volatility in recent years, but the region is emerging from the fallout of political scandals, […]

Benzinga – Sep 2016

Avoid Fed Shenanigans With This Real Estate ETF

Benzinga – Aug 2016

Meet This Year’s Best Real Estate ETF

Meet This Year's Best Real Estate ETF

The Federal Reserve’s refusal to raise interest rates to this point in 2016 coupled with investors’ seemingly unquenchable thirst for higher-yielding assets have created a perfect storm for real estate stocks and the corresponding exchange traded funds.

Additionally, real estate stocks and ETFs are getting increased attention ahead of the move, happening at the end of this month, that will see the group depart the financial services sector and become the 11th GICS sector. Obviously, those factors are benefiting US-focused real estate ETFs, but this year’s best-performing real estate is an emerging markets fund.

That honor goes to the Tierra XP Latin America Real Estate ETF LARE 0.33%, which as of August 9, is up 36.6 percent year-to-date. Said another way, LARE has posted better than double the returns offered by the largest U.S. real estate investment trust ETF.

Related Link: It Might Be The Perfect Time To Buy A Home: Here’s Why

LARE debuted in December and tracks the Solactive Latin America Real Estate Index.

“The Solactive Latin America Real Estate Index screens for all listed equities with primary listings in the Latin America region and which derive substantially most of their income from real estate and real estate services. The Index then uses dividend yield, market capitalization and liquidity in the underlying shares to determine weights. The Index is rebalanced quarterly,” according to Tierra Funds.

With Brazil being one of this year’s best-performing markets, emerging or otherwise, LARE may garner comparisons to traditional Brazil ETFs. However, such comparisons are inaccurate. Brazil and Mexico, Latin America’s two largest economies, combine for 96 percent of LARE’s weight, meaning the ETF is more a dual country/regional fund than a single-country ETF.

Said another way, with Brazilian stocks hot, LARE is not going to outperform a traditional large-cap Brazil ETF. Simple math confirms as much, but that doesn’t diminish LARE’s opportunity set. Certainly not at a time when yield is a primary concern for many investors.

For those that insist on labeling LARE as a Brazil ETF, notable are the facts that as of August 9, LARE is showing volatility that is about half that of the largest Brazil ETF and a dividend yield that is more than 340 basis points higher. Speaking of yield, LARE’s dividend yield is 5.58 percent, which is far superior to what investors will find on standard U.S. REIT ETFs.

Likewise, combining the dividend yields on the larges Brazil, Mexico and Latin America regional ETFs generates a number that is below LARE’s yield.

Year-to-date, LARE has outperformed all other LatAm ETF strategies with the exception of the benchmark Brazil ETF and the lone Peru ETF.

Forbes – Aug 2016

As Rio 2016 Kicks Into Full Gear, Can The Surging Bovespa Receive An Olympic-Inspired Bump?

With the exception of a few notable cases brought about by extraordinary circumstances such as the global financial crisis eight years ago, local stock markets in the host nation of the Summer Olympics have spiked noticeably in recent years while the eyes of the world have gazed upon their nation for the momentous event.

Over the last three decades dating back to the 1984 Los Angeles Summer Olympics, six of the last eight host countries have enjoyed a bump among their main stock indexes while the Olympic cauldron remained lit. Although the Shanghai Composite Index plunged nearly 8% during the 2008 Games as the global subprime mortgage crisis escalated, local stock markets have enjoyed substantial gains in three of the last five Summer Olympics. When Atlanta hosted the Olympics for the first time ever in 1996, the Dow Jones Industrial Average jumped 4.66% amid an explosion in commercialism, as a towering, 65-foot high Coca-Cola bottle dominated the backdrop of the Centennial Olympic Stadium.

The Bovespa Stock Index, however, presents a unique set of circumstances that neither economists, nor foreign policy experts have encountered in the history of the modern day Olympics. As the Rio Olympics kick into full gear this week, analysts will keep a close eye on fluctuations in the Bovespa, beginning with Monday’s session – the first since the Games began with a resplendent Opening Ceremony on Friday evening.

Despite a deep, prolonged recession and a string of corruption scandals that have rocked the nation’s executive and legislative branches, Brazil’s currency and stock market have staged an improbable rally over the last several months. The Bovespa, Brazil’s benchmark index, has already surged 33% year-to-date and is up more than 4,500 points since the lower house of the Brazilian Parliament voted to initiate impeachment proceedings against suspended Brazil president Dilma Rousseff on April 17. Meanwhile, the Brazilian real has jumped nearly 25% against the U.S. dollar since last October, as the global Emerging Market rout has eased and foreign investors have regained confidence in the Brazilian economy. As a result, Foreign Direct Investment inflows in Brazil soared over the first quarter, rising considerably from $13.1 billion to $17 billion on an annual basis.

The Bovespa could be the latest local stock index to enjoy a bump from the Olympics while the world’s top athletes converge in Rio (Richard Heathcote/Getty Images).

“What is unusual about Brazil is the fact that the stock market has done as well as it has in the months leading up to the Olympics. I think quite frankly it’s because of the political environment in Brazil,” said James P. Moore, Jr., managing director of the Business, Society, and Public Policy Initiative at Georgetown University’s McDonough School of Business. “It was at such a low base that once President Rousseff was effectively arrested and the new government came in, it gave some ability to calm the fears of not only the Brazilian people, but investors and others overseas, allowing for the stock market to take off in a way that you would not necessarily see in the history of other stock exchanges and host countries.”

With an estimated half-million foreign visitors expected to descend upon Rio over the next two weeks, a litany of stocks in the tourism sector could flourish before the flames are extinguished. Analysts will closely monitor transport stocks to gauge demand among airlines and rental car companies, as well as hotel occupancy for a comparison with vacancy rates two summers ago during the 2014 World Cup. Last week, Quartz reported that there were 27,137 hotel rooms in Rio de Janeiro for the month of June, representing a 37% uptick from 2012, according to research firm STR.

As the Atlanta Olympics illustrated, the Games have been synonymous with major international brands such as Coke, Samsung and Visa – each of which will maintain a significant presence in Rio. While many industry experts anticipate a boon for the household names, a number of Latin American analysts are more focused on the impact of the Olympics on leading Brazilian sponsors. Claro, the parent company of Brazilian telecom giant Embratel, will have its logo plastered throughout the net at the Beach Volleyball venue on Copacabana beach. Others like Brazilian beverage company AmBev, the fifth-largest brewery in the world, hope to grow their brand outside South America, as thousands of foreigners try the samba for the first time.


Barrons – Aug 2016

Reprinted from Barron’s

3 Brazil Headlines: Temer Fingered, Petrobras Sales, REITs Attractive?

The iShares MSCI Brazil Capped exchange-traded fund (EWZ) is up nearly 2% today, pushing the fund’s weekly performance well ahead of the 1% decline in the iShares MSCI Emerging Markets ETF (EEM).

Some of the headlines coming from Brazil:

Brazil’s interim President Michel Temer denied allegations that he had a part in a graft scheme at state oil company Petroleo Brasileiro or Petrobras (PBR), the country’s biggest ever corruption scandal. Petrobras shares are up more than 2% this week. The Wall Street Journal in a story today writes:

” … Temer denied the claims made in plea-bargain testimony by Sergio Machado, former head of Petrobras Transporte, or Transpetro, a fuel-transportation and logistics subsidiary. Mr. Machado has testified that in 2012 he organized, at Mr. Temer’s request, a donation of 1.5 million reais (about $432,000) from a construction firm to Mr. Temer’s political party, in exchange for Transpetro contracts. Mr. Temer dismissed the accusations as “frivolousness”… “irresponsible lies” …But the sweeping charges laid out by Mr. Machado may not be quickly or easily dispelled. They implicate some two-dozen politicians from seven different political parties …”

Meanwhile analysts project that Brazil officials will impeach President Dilma Rousseff by mid-August.

Petrobras, Brazil’s state-run oil company, received bids for a stake in its fuels-retailing unit BR Distribuidora in recent days, chief executive Pedro Parente said in his first television interview since taking the helm June 1, according to Reuters. He is trying to speed up the sale of assets — $14 billion in hoped-for divestments of oilfields, processing and distribution systems, power plants and other operations — to cut its $130 billion debt. See the Reuters story, Petrobras received bids for unit in recent days, CEO

Tierra Funds Jamie Anderson said in a prepared release that the U.S. Federal Reserve’s decision to delay an increase in interest rates provides “much needed breathing room” for emerging markets, especially China and Brazil. Tierra is  promoting a so-far small and illiquidfund it launched in December, the Tierra XP Latin America Real Estate ETF (LARE), which is focused on Brazil and Mexico real estate. Anderson the writes:

“Brazil’s central bank released its minutes Wednesday from its latest policy meeting and noted, among other things, that rate cuts will be on hold a little bit longer as inflation is still well above target levels. That said, year on year CPI has fallen from roughly 10.5% to 9.6% and the central bank believes we should see moderately lower CPI as we get into the summer season. We continue to view risk-adjusted yields from Brazil REITs as quite attractive and have noted above-average trading volume on many non-REIT real estate equities lately, which to us suggests that investors are positioning for what many expect to be a constructive second half of the year.”

The Tierra real estate ETF is up 16% this year, in line with the much larger and more diversified iShares Latin America 40 ETF (ILF).

CNBC Europe – Aug 2016

Olympics beset by inconveniences, not disasters