How to Buy Into Brazil’s Tech and Internet Boom with ETFs

Brazilian equities are not having the best of times this year. Even after posting seemingly handsome gains of 19.7% in YTD 2017 according to the performance of the MSCI Brazil Index, the country lags far behind the MSCI indices of its Latin America peers Chile (36.3%) and Peru (31.4%) as well as the broad MSCI Emerging Markets Index (30.7%). Being that Brazil was the standout performer of 2016 for Latin America, the pace would have been difficult to maintain.

2017 was nonetheless expected to be a big year for the country having been bogged down in political upheaval and economic scandal, but corruption issues have continued to plague the economy as well as the stock market.

While financials continue to dominate the portfolios of broad-based large and mid-cap focused funds investing in Brazil and have done most of the heavy lifting in the gains seen in 2017, companies in the information technology space can be an interesting proposition going forward.

For those investors who want to take the exchange-traded fund (ETF) route to investing in the country’s tech companies, the following funds can be considered (we have also included the telecom services sector in these calculations).

ETF options

There are eight funds listed on US exchanges which are dedicated to investing in Brazilian equities. Three of them (BZQ) (BRZU) (UBR) are leveraged, hence we’ve removed them from this review as they may not suit the needs of the majority of investors.

Upon analyzing ETF options, it became clear that in order to partake in the tech and internet segment in Brazil, investors will need to go small in terms of market-cap if they want to have a bigger share of the segment.

VanEck Vectors Brazil Small-Cap ETF (BRF): The fund tracks the performance of the MVIS Brazil Small-Cap Index and is invested across 59 holdings. The information technology and telecom services sectors form a combined 9.2% of the fund’s portfolio – by far the largest exposure among ETFs investing in Brazilian equities.

Three companies comprise the information technology sector – TOTVS S.A. (TTVSF), Linx S.A. (LINX3.SA), and Sonda S.A. (SONDA.SN). Of these, TOTVS has the highest exposure and has done quite well this year. Oi S.A. (OIBRQ) – the sole holding from the telecom services sector – has outperformed the sector.

Though the ETF seems relatively small, with only $113 million in assets, it is the largest one investing in small-caps from the country and has posted strong gains in excess of 50% in YTD 2017. Its net expense ratio is 0.6%.

iShares MSCI Brazil Capped ETF (EWZ): The largest fund on US exchanges providing access to large and mid-cap Brazilian equities has only a small exposure to tech stocks. However, combined with telecom stocks, the fund provides the second highest exposure (~5%) to these sectors combined after the BRF.

Traditional heavyweight Cielo S.A. (CIOXY) is the sole holding from the tech sector while Telefônica Brasil S.A. (VIV) and TIM Participações S.A. (TSU) comprise the telecom services sector.

With $6.8 billion in assets, the EWZ is the go-to fund for investing in Brazil. Though it does not invest into up and coming companies from the tech and internet segments, it can provide a starting point for investing in large-cap stocks from the country.

iShares MSCI Brazil Small-Cap ETF (EWZS): Another small-cap fund, the EWZS has $80 million in assets, is invested across 64 holdings, has an expense ratio of 0.6%, and has higher exposure to stocks from the information technology sector (4.6%) compared to its large-cap cousin, the EWZ (2.1%).

Similar to the BRF, TOTVS has led gains from the information technology sector, but the EWZS does not invest into the telecom services sector.

KraneShares Emerging Markets Consumer Technology ETF (KEMQ): This fund is a new option for investors looking for an exposure to the tech and internet segments in Brazil.

The KEMQ was launched on October 12, 2017 so it does not have any performance track record to speak of. However, in this very short span of less than a month, Brazilian equities, which form 7.7% of the fund’s portfolio, have emerged as the second highest contributor to the fund behind those from South Korea.

Of the four Brazilian companies whose stocks the fund is invested in, only one (Cielo S.A.) is a pure tech company, the other three are in-between consumer discretionary and tech companies. Of them, B2W CIA DIGITAL (BTOOY) and Somos Educação S.A. (SEDU3.SA) have helped Brazil climb to the second spot in terms of geographic contributors to the funds performance.

What Are The Biggest Blockchain And Digital Currency Initiatives In Latin America Right Now?

Latin America: less faith in local currencies

Only 51% of the Latin American (ILF) economy has access to banking services, with political and currency fluctuations repeatedly undermining trust in local currencies. Moreover, increased compliance requirements and costs have caused many traditional financial institutions to exit the market. This phenomenon offers a growth opportunity to automated compliance, blockchain technology innovations, digital currency platforms and cross-border payments systems that help avoid transaction costs.

Blockchain innovation initiatives being taken in Latin America

  • Brazil’s central bank is seeking to investigate possible use cases for blockchain technology and is now moving toward prototyping.
  • Brazilian (EWZ) (CSBR) banks have already trodden the path. Banco Itaú and Banco Bradesco are a part of the R3 consortium. Banco Bradesco is launching pilot projects such as a new digital wallet using blockchain technology in partnership with eWally and Bit.One, to address cross-border payments.
  • Chile’s (ECH) Santiago Exchange and IBM (IBM) have partnered to implement blockchain technology into the country’s financial services sector.
  • Mexico (EWW) based start-up, Bitso secured $2.5 million in funding in early 2017.
  • Mexican venture capital fund, INGIA, invested in Abra, the US blockchain mobile payments startup.
  • In Argentina (ARGT), startups such as Rootcamp provides smart contract solutions for bitcoin technology, while SatoshiTango and Xapo provide bitcoin-based payments solutions.
  • Argentina-based Ripio wants to transform banking on the blockchain with the Ethereum blockchain’s ERC 20 protocol credit network using smart contracts for borrowers, lenders and underwriters.
  • Uruguay is currently experimenting with its own blockchain-based digital currency, according to a statement made by the Banco Central del Uruguay’s (BDC) chief, Mario Bergara.
  • Cryptobuyer, a leading cryptocurrency (ARKW) (ARKK), and digital assets company in the Latin America is the first company ever to install Bitcoin ATMs (BTMs) in a commercial bank (Banistmo Bank’s headquarters).

Amazon Is Quietly Moving Into Brazil — These Are Its 3 Biggest Competitors

Brazil ranks 10th in world retail

The e-commerce industry in Brazil (EWZ) (BRAQ) (BRZU) ranks 10th in the world in size. With a population over 200 million, a large consumer base comprised of an outsized share of millennials, and rising median household incomes, this Latin American (ILF) economy offers the perfect playing field for e-commerce businesses.

Amazon to expand in Brazil

US-based e-commerce platform Amazon (AMZN), the world’s leaders in online retail sales, first set foot in Brazil five years ago. However, its product offering never extended beyond books. This is about to change though. The company is now looking to expand its offerings in the country, which until now had been delayed on account of high taxes and infrastructural setbacks in Brazil.

Over 61 million Brazilians currently shop online, and this figure is forecasted to reach 87.8 million by 2020 (chart above). Retail e-commerce sales in Brazil amounted to $16.58 billion in 2016, and this figure is expected to at least double by 2021. An interesting point here is that about 49% of digital buyers in Brazil made cross-border purchases in 2016, according to PFSweb, Inc. This helps build the case for multinational e-commerce players such as Amazon (AMZN), which are already positioning themselves to tap into this opportunity.

Amazon.com is listed on the NASDAQ GS stock market under the ticker AMZN. The stock is up 29.68% YTD (as of October 26) and boasts a $468.6 billion market capitalization. In financial year 2016, the company reported an ROIC of 7.25%, operated with an EBITDA margin of 9.05%, and a gross margin of 35.09%. EPS growth rate for the company was reported at 290.7%. The company earned a whopping $136 billion in global retail website revenues in 2016.

So, before the mammoth retailer commits to a much-anticipated expansion in Brazil, it is worthwhile to take a quick look at its 3 biggest competitors already cashing in on the Brazil’s massive online consumer base.

The 3 e-retailers in Brazil bracing for an Amazon (AMZN) assault

  1. MercadoLibre (MELI)

MercadoLibre Inc. (MercadoLivre in Portuguese) is Latin America’s leading e-commerce technology company.  The website allows businesses and individuals to list items and conduct sales and purchases online in either a fixed-price or auction format.

Listed on the NASDAQ GS stock market under the ticker MELI, MercadoLibre commands a market capitalization of $10.1 billion and is up 46.7% YTD (as of October 26). The stock currently trades at a P/E of 61.01. Forward P/E (as of 12/17) for MELI is estimated at 84.6. Analysts who reviewed the stock from a buying perspective have rated the stock 3.59/5, comprising 35.3% BUY, 58.8% HOLD, and 5.9% SELL recommendations.

For the 2016 financial year, the company reported an ROIC of 18.72% and operated with an EBITDA margin of 24.88%, and a gross margin of 63.58%. EPS growth rate for the company was reported at 18.9%. The company earned $455 million in revenues from its marketplace business in Brazil in 2016.

  1. B2W Companhia Digital (BZWHF) (BTOW3.SA)

B2W Companhia Digital engages in the e-commerce business through a digital platform in Brazil. The company offers through its website, products including books, CDs, DVDs, IT equipment, electronic equipment, perfumes, and clothing.

Listed on the Brazilian stock market under the ticker BTOW3, the stock commands a market capitalization of $3.1 billion and is up 126.2% YTD (as of October 26). The company’s US-listed ADR, BZWHF is up 151.7% YTD (as of October 26). For the financial year 2016, the company reported an ROIC of 3.48% and operated with an EBITDA margin of 7.6%, and a gross margin of 19.91%. EPS growth rate for the company was reported at 16.6%. The company earned $2.5 billion in revenues from its e-commerce business in 2016.

Analysts who reviewed the stock from a buying perspective have rated the stock 3.13/5, with 25% BUY, 56.3% HOLD, and 18.8% SELL recommendations.

  1. Magazine Luiza (MGLU3.SA)

Magazine Luiza S/A operates a multichannel retail platform of mobile, website, and physical stores. The company offers e-commerce services and retails a wide range of electronics, toys, power tools, and houseware products. Magazine Luiza develops big data, machine learning, and other technologies to remove friction from the retail process.

Listed on the Brazilian stock market under the ticker MGLU3, the stock commands a market capitalization of $3.8 billion and is up 395% YTD (as of October 26). The stock currently trades at a P/E of 54.91. Forward P/E (as of 12/17) for MELI is estimated at 34.66. For the financial year 2016, the company reported an ROIC of 17.02% and operated with an EBITDA margin of 7.13%, and a gross margin of 30.74%. The company earned $2.7 billion in revenues from its retail business in 2016.

Analysts who reviewed the stock from a buying perspective have rated it 4.43/5, with 71.4% BUY, and 28.6% HOLD recommendations.

Equities Hit Record Highs In South Africa, Now Overseas Investors Are Rushing Out

Stock indices in South Africa are witnessing record highs. The JSE All Share Index touched the 58,000 level for the first time on October 16. Meanwhile, the MSCI South Africa Index is up nearly 15% on the year.

It is quite a distance behind the MSCI Emerging Markets Index, which has gained 30% in the year so far, but it has done much better than country indices for Qatar, Pakistan, and Russia – all of which are in the red. It has also outperformed Indonesia (12.8%), Malaysia (12.6%), Colombia (11%), Greece (10.9%), the United Arab Emirates (6.3%), and Egypt (1%) as well.

Given the political and economic quagmire the country finds itself in, this is quite a commendable feat that the stock market has achieved.

However, equities in South Africa are not looked fondly upon by foreign capital.

Foreigners avoiding stocks

The graph below shows the net purchases/sales by foreign investors in the equity segment of the Johannesburg Stock Exchange.

For the week ending October 20, the stock market has seen net outflows of $83 billion rand ($6.1 billion) from foreign investors in 2017 even after a record-setting year for local equity indices. In the same period last year, foreign investors had pulled out $101 billion rand ($7.3 billion) from equity markets.

At the end of September 2017, net outflows had stood at close to $90 billion rand ($6.6 billion), but some buying in October has reduced net outflows from a country which is the sixth largest in the emerging markets universe.

One would need to look back to the turn of this decade in order to find any meaningful net purchase amount in the equity segment. For a year with net purchases worth over $50 billion rand ($6.5 billion at the time), one would need to go back to 2009.

Similar trend in ETFs

Exchange-traded funds investing in South Africa have attracted net inflows amounting to $30 million in YTD 2017, according to Bloomberg data. The top three funds in terms of net inflows are listed in South Africa and are CoreShares Top 50 ($41 million), Satrix 40 ($22 million), and New Gold Platinum ETF ($20 million).

However, the sole ETF listed on US exchanges – the iShares MSCI South Africa ETF (EZA) – has seen outflows worth $41.3 million in the year so far.

To provide a perspective, in a year in which emerging market ETFs have outshone their developed market peers, country-focused funds have seen inflows worth $2.6 billion in this year so far, according to Bloomberg data. Brazil leads the universe with the iShares MSCI Brazil Capped ETF (EWZ) having witnessed net inflows of $1.6 billion in YTD 2017.

In the next article, we will look at the status of South African bonds and what the future holds for both these asset classes.

These Two African Countries Account For 60% Of the World’s Cocoa Production

World cocoa production is dominated by the emerging and frontier markets

The list of world’s top 10 cocoa producers is comprised of all emerging (EEM) (VWO) and frontier (FM) (FRN) market nations. Ivory Coast and Ghana top the list with about 1.5 million and 0.8 million tons of cocoa beans produced, annually. Together, they account for approximately 60% of the world’s cocoa production.

Ivory Coast and Ghana produce 60% of the world’s cocoa

In Ivory Coast, leader of the top cocoa producers in the world, the cash crop accounts for over 60% of its trade revenue. Chocolate manufacturers such as Nestle and Cadbury receive much of their cocoa from Ivory Coast.

Ghana is the second leading cocoa manufacturing country. Cocoa is critical to the country, accounting for 1/6th of the economy’s GDP. Next in line are Indonesia (EIDO), Nigeria (NGE), Cameroon, Brazil (EWZ), Ecuador, Mexico (EWW), Peru (EPU), and the Dominican Republic, all contributing an outsized share of world cocoa production.

Now, the price of cocoa has been sliding over the past year on account of a supply glut, leaving a bitter taste in these nations, which are exceptionally dependent on the soft commodity.

Cocoa farmers earn just 6.6% of the price of chocolate

Ivory Coast and Ghana currently have a combined GDP of $69.3 billion, according to World Bank data. Meanwhile, chocolate manufacturers such as Nestle have annual sales of about $90 billion. Farmers employed towards producing 60% of the world’s key chocolate ingredient end up earning about 6.6% of the final price of chocolate.

However, these two frontier markets are now looking to capture a larger share of the earning, and have more influence on world cocoa prices. In the next section, we will take a closer look at their strategies.

Amazon Buys Stake In India-Based Retailer: These 3 BRICS Acquisition Targets Could Be Next

Amazon buys 5% stake In Shoppers Stop

Global e-commerce retailer Amazon (AMZN) is buying a 5% stake in India (INDA)(NSEI) listed retailer Shoppers Stop, as part of a broader effort to establish a lasting foothold in the country. Shoppers Stop will issue 4.4 million shares to Amazon for 407.78 rupees each, equating to a deal value of approximately $27 million. As part of the agreement, Amazon experience centres will be set up at each of Shoppers Stop’s 80 stores across the country. Shoppers Stop, which sells cosmetics, clothing and home appliances at its outlets, will have an exclusive flagship store on Amazon India’s site where it will retail its entire 400 brand portfolio. This deal would aid Shoppers Stop to boost revenues and add 25% stores to its existing network.

This move is Amazon’s first investment in a publicly traded retailer in India and follows Jeff Bezos’ announcement of a $5 billion investment in India. The major allocation to India was earmarked as Amazon seeks to gain an edge over local rivals in the fast growing consumer market. This deal would provide Amazon strategic access to smaller second and third-tier cities in India where Shoppers Stop already has an established store network. Amazon is said to be playing it safe in India, after getting washed out from China (MCHI)(FXI) by Alibaba (BABA) and other local players.

Shares of Shoppers Stop surged nearly 20% after the deal was made public, its highest intraday gain since 2009. Shares of the retailer have gained 55% this year, outperforming broad-based benchmark indices. Comparatively, Amazon’s shares are up 27% in 2017 to date.

BRICS retail leaders

Deepening Internet penetration and widespread adoption of smartphones has brought exponential growth to e-commerce retail in BRICS countries. BRICS nations provide online retailers a huge opportunity for inorganic growth through strategic acquisitions. Alibaba research estimates online shoppers in these countries to grow to 1.35 billion by 2022, which would then constitute 61% of global online shoppers. In 2016, BRICS nations accounted for 47% of global online retail sales, a number which is expected to grow to 59% by 2022.

BRICS economies boast of many large retailers that could become strategic acquisition targets for Amazon and other global e-commerce giants. In Indonesia, one of the most populous countries in the world, e-commerce is largely dominated by Alibaba-owned Lazada. This may result in Amazon focusing on other ASEAN countries at first to gain regional market share.

The three largest retailers in Brazil (EWZ), South Africa (EZA), and Russia (ERUS) by revenues are Magnit, Shoprite Holdings, and CIA Companhia Brasileira de Distribuição. In 2016, these companies reported revenues of $16 billion, $10.4 billion and $12 billion respectively.

Magnit

Magnit is Russia’s largest retailer with 14,059 stores as of December 2016, which includes 10, 521 convenience stores, 237 hypermarkets, 194 “Magnit Family” stores and 3,107 “Magnit” Cosmetic stores. Magnit operates in 2,495 locations in Russia and is among the world’s largest retailers by market capitalization. The company has market cap of $16 billion, comparable to market cap of large retailers like Carrefour and Kroger.

Shares of the company are publicly listed on the London and Russian Stock Exchanges with tickers MGNT.IL and MGNT.ME respectively. The company’s Russia listed shares have declined 8% in value in 2017 so far.

Shoprite Holdings

Shoprite Holdings (SHP.JO) is South Africa’s largest food retailer with 2,689 stores in 15 countries across Africa and Indian Ocean islands. Shoprite Holdings operates through the following subsidiaries:

  • Shoprite Checkers – consists of supermarkets under the Checkers and Shoprite brands, Checkers branded hypermarkets, furniture outlets, Hungry Lion-branded fast food outlets, liquor shops and pharmacies.
  • Computicket – this is Shoprite’s ticketing business that operates through various counters within its stores and free-standing outlets
  • OK Franchise – procures and distributes goods to various supermarkets, grocers and wholesale stores operating under the OK brand, including liquor shops.

In 2016, the company reported revenues of $10.4 billion. Currently, it has a market cap of $8.9 billion, and is among the largest stocks on the Johannesburg Stock Exchange. The company also has secondary listings on the Stuttgart (HY7.SG) and Frankfurt Stock Exchanges (HY7.F) and OTC Markets (SRGHY). The company’s Johannesburg listed shares have gained 18.8% in value to date in 2017.

CIA Companhia Brasileira de Distribuição

CIA Companhia Brasileira de Distribuição, also known as CBD, operates supermarkets, hypermarkets and home appliance stores in Brazil. The company is also involved in general merchandising, retailing of food, electronics, and home appliances through its various stores across Brazil.

It is currently the largest Latin American retailer by revenue and the second largest online-retailer in Brazil. In 2016, the company generated revenues of $11.9 billion and operating margins of 4.4%. The company operates its e-commerce portal through Cnova Brasil. Grupo Exito, Brazil’s largest food retailer, owned 18.7% of the company while French retailer Grupo Casino owned 22.8%.

Currently, the company has a market cap of $6.3 billion. It has secondary listings on the New York Stock Exchange with ticker CBD. The company’s Johannesburg listed shares (PCAR4.SA) have gained 38% in value to date in 2017.

5 Auto Manufacturers in BRICS Nations Making Major Investments In Electric Vehicles

Electric vehicle manufacturers to rise with the tide

Electric vehicles (or EVs) continue to grab headlines as various governments worldwide announce new legislation and strategies to reduce vehicles powered by gasoline and diesel engines. Indeed, Bernstein research predicts that EVs could represent 40% of auto sales and 30% of the global car market in 20 years. UBS Group (UBS) believes that a growing global electric vehicle fleet will begin to be disruptive to gasoline demand by 2031.

Surprisingly, emerging markets (EEM) (VWO), are in many cases keeping pace with their developed market peers in the drive away from traditional auto engines. Tracking new technology and related products in these markets is an investment theme set to attract major fund flows.

The 5 biggest vehicle manufacturers in BRICS

We ran a filter on all the automakers currently selling products into the electric vehicle space, and originating from the BRICS nations (being the prominent area of focus within the emerging markets due to size and scale), to arrive at 5 largest automakers foraying into the EV space. Here’s the list of the five biggest auto manufacturers (by revenue) from BRICS nations (Brazil (EWZ)-Russia (RSX)-India (EPI)-China (FXI)-South Africa (EZA)) that are currently cashing in on growing demand in the electric vehicle space:

Company Name (Ticker) Country Revenue T12M ($bn) Market Cap ($bn) Total Return YTD (Sep 21) P/E
SAIC MOTOR CORP LTD-A (600104.SS) China 793.7 341.5 36.6 10.4
MAHINDRA & MAHINDRA LTD (M&M.BO) India 740.0 802.7 10.0 18.8
MARUTI SUZUKI INDIA LTD (MARUTI.BO) India 669.2 2452.9 54.6 32.5
HERO MOTOCORP (HEROMOTOCO.BO) India 282.8 770.0 31.2 21.1
AVTOVAZ PJSC (AVAZ.ME) Russia 200.3 48.5 13.8  N/A

 

As is evident from the table above, all of these firms have delivered strong returns to investors so far this year. Maruti Suzuki’s stock is up about 55%, while SAIC Motor and Hero Motocorp have delivered over 36% and 31% returns to investors, respectively.

SAIC Motor Corp (600104.SS)

SAIC Motor Corp is China’s largest automaker. With over $341 billion in market capitalization, the company’s stock is listed on the Shanghai stock exchange under the ticker 600104. The stock has returned 36.6% YTD (as of September 21) and currently trades at a P/E of 10.4.

The company is keen on the plug-in hybrid electric vehicle (PHEV), electric vehicle (EV) and fuel cell technologies. Its electric drive unit (EDU) was awarded first place at the 2016 China Automotive S&T Award Ceremony. In 2016, sales of new energy vehicles under SAIC’s self-owned brands increased 84% year-on-year to surpass 25,000 units. In 2017, SAIC Motor plans to launch more new brands to improve the sales of new energy vehicles to over 80,000 units.

The company has founded the Global Car Sharing & Rental Co Ltd to offer timeshare leasing of electric cars. In 2016, the car-sharing company launched 8,400 new energy cars and built 2,800 charging stations in 20 cities. The service is scheduled to cover 100 cities in 2020, with 300,000 vehicles.

Mahindra & Mahindra Ltd. (M&M.BO(MAHMF)

Currently, Mahindra & Mahindra is the only manufacturer of electric cars in India (INDA) (INDY). The company’s stock is listed on the Bombay Stock Exchange with the symbol M&M and also on the NYSE’s OTC market under the ticker MAHMF. With $802 billion in market capitalization, the India-listed stock of the company trades at a P/E of 18.8 currently. The stock has returned 10% to investors YTD.

Mahindra Electric, the company’s electric vehicles division, has the e20plus, eVerito and eSupro in its stable. The company expects EV sales to triple in 2017. It has already partnered with shared mobility platforms, rental firms (such as Zoomcar) and cab aggregators to promote the usage of electric cars.

The company has a current capacity to make 400-500 EVs/month and seeks to increase this capacity to 5,000 vehicles a month over the next 2 years. Mahindra is also working on a high-end electric powertrain technology, which will allow cars to run for 200-300 km with a single charge from the existing range of 100-140 km. A luxury electric sedan could also come from the M&M stable, targeting international markets.

The company has also entered into a partnership with Ford Motor Co. (F) to cooperate in areas including driverless and electric cars. For M&M, there’s money to be made in a nascent EV sector. “This is not a trade-off. This is the single biggest business opportunity for the next couple of decades,” said Anand Mahindra, the company’s chairman on clean technology, at the Bloomberg Global Business Forum in New York on September 20. The company is also currently looking for a joint venture partner in the world’s biggest EV market, China (YINN).

Maruti Suzuki India Ltd. (MARUTI.BO) (MRZUY)

This Indian automaker’s stock is listed on the Bombay Stock Exchange with the symbol MARUTI and also on the NYSE’s OTC market under the ticker MRZUY. The company boasts of a $2.5 trillion in market capitalization on the Indian exchange. The stock is expensive at a P/E of 32.5 currently. However, the stock has returned 54.6% to investors YTD.

While the company currently does not offer a pure electric vehicle, its product offerings include hybrid cars – Ciaz SHVS and Ertiga SHVS. These smart hybrid vehicle offerings of the company have record cumulative sales of over 100,000 units a month and participate in the government of India’s FAME India* scheme, which aims to promote Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India.

Hero Motocorp (HEROMOTOCO.BO) (HRTQY)

Hero Motocorp is a leading motorcycle and scooter manufacturer based in India. The company’s stock is listed on the Bombay Stock Exchange with the symbol HEROMOTOCO and also on the NYSE’s OTC market under the ticker HRTQY. With $770 billion in market capitalization, the India-listed stock of the company trades at a P/E of 21.1 currently. The stock has returned over 31% to investors YTD.

The company currently offers a range of electric 2-wheelers and 3-wheelers. Hero Electric began developing electric vehicles over ten years ago which resulted in the first electric scooter products launched in the Indian market in 2007. Since then the company has sold over 100,000 vehicles in India. With over 50% market share in the electric scooter market, the company is the dominant player in India’s electric two-wheeler market.

The company has also been very active in promoting the electric vehicle industry through the formation of an industry association and by approaching the government to provide subsidies of up to 20-25% on all electric scooter sales.

Avtovaz PJSC (AVAZ.ME)

AvtoVAZ is the Russian automobile manufacturer formerly known as VAZ: Volzhsky Avtomobilny Zavod, but better known to the world under the trade name Lada. The VAZ factory is the largest car manufacturer in Russia, and one of the largest in the world. The company is the single Russian company pursuing electric cars, with their electric Lada Vesta.

The company’s stock trades on the MICEX exchange under the ticker AVAZ, commanding a market cap of $48.5 billion. The stock has returned 13.8% YTD.

Tata Motors (TTM)

While the above five top the list of BRICS automakers that have forayed into electric vehicles, the overall biggest automaker BRICS nations by revenue, Tata Motors (TTM), is set to zoom into the electric vehicle space as well. There’s talk of Tata Motors launching an all-electric Tiago. The UK-based subsidiary Tata Motors European Technical Centre (TMETC) hinted that the Tiago EV might deliver 100 km on one full electric charge, will accelerate from 0-100 kmph in about 11 seconds in sports mode, and would be capable of a top speed of 135 kph.

The 5 Brazilian Stocks Hit Hardest By Latest Political Corruption And Bribery Scandals

Political crisis spooks Brazil’s stock markets

Brazil’s stock markets plunged in the last two months after reports of a scandal by the President Michel Temer. State-owned companies Petrobas, Centrais Electricas Bras and Banco do Brasil were hit the most as political turmoil sent assets lower.

Now Brazil is pushed into a deeper political crisis after accused President Temer became the country’s first head of state to be formally convicted of corruption while in power. The Attorney General of Brazil’s Supreme Court charged Temer with taking million of dollars as a bribe from the country’s meat packing company JBS. This charge comes less than a year after Dilma Rousseff, the previous President, was ousted on criminal charges.

Shares of the iShares MSCI Brazil Capped exchange-traded fund (EWZ) have tanked 5% since May 18 and have underperformed the iShares MSCI Emerging Markets ETF (EEM). Fund flows to Brazil however continue to remain undeterred as investors consider this dip as an attractive entry point. 

Worst hit stocks

In the past three months, the worst performing Brazilian stocks were JBS SA (JBSS3), Naturas Cosmeticos (NATU3.SA), Mahle Metal Leve (LEVE3.SA), Centrais Electricas Bras (ELET6.SA) and Petrobas (PETR3.SA).

JBS SA

JBS (JBSS3), Brazil’s largest meat-packing company has been slapped with $3.36 billion fines to settle allegations of bribery. JBS is at the center of the latest political corruption probe that was triggered in May. Shares of the company have tanked 21% since May 18 and 34% YTD.

The company’s shareholders have turned to Banco Bradesco’s investment banking unit to dispose off some assets in order to raise money to settle the fines. These hefty penalties have spooked investors and led to a one-third decline in the company’s stock price in 2017 so far. Market capitalization of JBS has declined by 21% since May 18.

The largest shareholder in JBS – the Batistas – are considering selling off Fábrica de Produtos Alimentícios Vigor SA and sportswear and shoemaker Alpargatas SA to raise funds to pay off the fines.

Naturas Cosmeticos

Naturas Cosmeticos (NATU3.SA) stock price has declined 27% over the past three months and 13% over the last one month alone. The company trades on the Sao Paulo Stock Exchange and has a market capitalization of $3.1 billion.

Natura has also invested in compliance systems in the last two years to adhere to Brazil’s Clean Companies Act and control corrupt acts by employees.

Petrobas

Petrobas (PETR3.SA), Brazil’s state-run oil company, has been engulfed in corruption scandals since 2014 that have cost the company nearly $13 billion in the past five years.

The company was charged $2.1 billion in fines in 2015 and $833 million in March 2017 for manipulating oil prices. It also had impairment losses of $14.8 billion. The loss reflects the decreasing value of the company’s assets resulting from the drop in oil price, project delays and other factors. In early 2015, the company formed a compliance team of nearly 350 employees to prevent further instances of corruption.

These corruption scandals have put pressure on the company’s balance sheet at a time when it is already battling low oil prices. To improve cash flow, it cut its workforce by 20% and reduced capex by 32%. Further, it sold off assets to reduce its debt load including a natural gas pipeline system with Brookfield Infrastructure.

Shares of the company are down 11% YTD and 8.4% over the last three months alone. Consequently, the state-run company has lost 15% of its market value during the year so far. Petrobas’ ADRs also trade on the New York Stock Exchange under the ticker PBR-A. 

Centrais Electricas Bras

Centrais Electricas Bras (ELET6.SA) is the Brazilian state-controlled utility provider engaged in the generation, distribution and transmission of power through various companies like Electrobas holdings, CGTEE, Chesf, Eletronorte, Eletronuclear, Eletrosul, Furnas, Amazonas Energia, Distribuicao Acre, Distribuicao Alagoas, Distribuicao Piaui, Distribuicao Rondonia, Distribuicao Roraima and Itaipu Binacion.

Even though shares of the company are down 36% YTD, it is expected to gain significantly from the Brazilian government’s plan to revamp the power sector. Brazil’s government is planning to overhaul power sector regulations by 2018 leading to lower taxes and promote foreign investments in the sector.

Centrais Electricas Bras trades on the Sao Paulo Stock Exchange (IBOVESPA) with a market capitalization of $6.1 billion. In the last three months, shares of the company have lost 16%.

Mahle Metal Leve

Mahle Metal Leve (LEVE3.SA) is a Brazilian auto parts manufacturer engaged in production and manufacturing of  pistons, bearings, connecting rods, valve train systems, air and liquid filter systems, industrial filters among other products. MAHLE Metal Leve provides components for vehicle manufacturers such as Volkswagen, Audi, BMW, John Deere, Porsche, Opel, Toyota, Ford, General Motors, Mercedes-Benz, Fiat, Renault, Peugeot, MWM-International, Cummins, Scania, Volvo, Caterpillar and Perkins, among others.

The company’s stock has declined 18% over the past three months and 13% over the last one month making it one of the worst performing Brazilian stocks. The company’s market capitalization has fallen by 18% year to date. The company trades on the Sao Paulo Stock Exchange (IBOVESPA) and has a market capitalization of $689million.

Valuations

Brazilian stocks are currently at steep discounts with the MSCI Brazil Index trading at average one-year forward PE ratio of 18x.

CIA Estadual De Geracao (EEEL3.SA), Centrais Electrics Bras, CIA De Transmissao De Ene (TRPL4.SA), CIA Paranaense De Energi (CPLE6.SA), Magnesita Refratarios (MAGG3.SA) and JBS are the most attractive stocks based on their cheap valuations. These stocks have one year forward PEs of 1.4x, 2.1x, 2.2x, 4.7x, 5.2x and 5.4x and are trading at the steepest discount to their peers. Meanwhile, Movida Participacoes (MOVI3.SA), Springs Global Participacoes (SGPS3.SA), Lojas Americanas (LAME4.SA), and Eletropaulo Metropoli (ELPL4.SA) are currently the most expensive stocks in Brazil.

Mobius: China’s Share of MSCI EM Index Could Be Up to 40%, Brazil and India to Balance Eventually

About 30% of the MSCI EM Index is China alone

“China could get too much of the index very soon,” Mark Mobius, executive chairman of Templeton Emerging Markets Group, had commented over a June 22 interview on Bloomberg. On June 20, index provider MSCI announced that in June 2018, it will begin including China A shares in the MSCI Emerging Markets Index (EEM) (VWO) and the MSCI ACWI Index (ACWI). Accordingly, by 3Q18, dollar-denominated Chinese stocks (FXI) (YINN) would command 28.55% of the MSCI Emerging Markets Index while China A shares (CNYA) would constitute a 0.73% of the index; which means about 30% in sum represented by China alone. “If you calculate where it could be based on the market capitalization, China’s share could be up to 40% of the index,” commented Mobius.

Mark Mobius’ optimism around India and Brazil

While shedding light on the massive weighting that China and its companies would soon be having on the MSCI Emerging Markets Index, Mobius also pointed to two other emerging markets that investors should keep in perspective. Mobius expects India (EPI) and Brazil (EWZ) to grow and balance out the overbearing of China on the MSCI EM index over time. This translates to a rather optimistic outlook on these two economies by an emerging market mogul.

India

On June 13th, Mark Mobius commented on his blog post that he is bullish on India. “Bureaucratic hurdles are still quite significant in India (EPI) (INDA) (INDY). Even with bureaucratic barriers, we believe India remains a very attractive destination for investors…..The big caps are expensive, but small caps are interesting,” said Mobius in his post. Mobius expects the introduction of Goods and Services Tax (GST) in India “to have a big, big impact on all the companies, particularly the small ones.”

Brazil

Moreover, the legendary emerging markets investor remains bullish on Brazil (EWZ), despite its political headwinds. “I think you’re looking over a three or four-year period maybe 40, 50 percent upside because we’ve come down a lot … I believe that this Lava Jato scandal situation is going to be very very good for Brazil because what it means is that reform will be forced into the government,” said in a Reuters interview on June 21st. Mobius likes beverage and consumer banking stocks in Brazil.

BRIC Laggards: Brazil and Russia Beaten Down By Low Commodities And Crude Prices

There’s a clear deviation between the economic performance of the BRIC (Brazil, Russia, India, and China) nations. While the latter two are still leaders in the pace of growth among major economies, Brazil and Russia have struggled due to the decline in commodities prices and crude oil prices, respectively.

Economic growth graphs of the two nations show that Russia has shown signs of starting a growth cycle while Brazil remains in recession territory even though it is expected to turn the corner to growth in 2017.

Fortunes turn for Russian and Brazilian stocks

Brazilian and Russian equities were among the top three emerging market performers in 2016. But 2017 has been a different story.

The VanEck Vectors Russia ETF (RSX) is the largest ETF investing in stocks from the country traded on US exchanges. The fund is down 9.5% for the year so far. Meanwhile, the iShares MSCI Brazil Capped ETF (EWZ) is up by about 2%.

While the RSX has had a poor year, and at best, was up 4% towards the end of January 2017, the EWZ was having a stellar year as recently as mid-May, when the fund was up 21%. However, political developments have taken their toll on stocks.

Equity outlook for Russia and Brazil

The Bank of Russia, in its latest monetary policy report, stated that crude oil prices may decline to $25 a barrel by mid-2018. This will squeeze the revenues of energy firms in Russia, which is the largest producer of crude outside OPEC.

In a bearish scenario for the energy sector, among the three major ETFs focused on Russian equities, the RSX is better positioned than the SPDR S&P Russia ETF (RBL) and the iShares MSCI Russia Capped ETF (ERUS) due to its relatively lower exposure to stocks from the energy sector. This reflects in their comparative performance as well where the RSX has declined the least and the ERUS has decline the most.

Even though the RSX is more expensive than the other two funds, its portfolio is ready to weather a low crude price environment better than the other two funds.

On a broader level, due to the geopolitical situation, Russian equities are not attractive to many investors at this juncture even with much cheaper valuations than other emerging markets. However, if later in the year, crude oil prices appear to stabilize at a higher level than anticipated, stocks from the country may offer interesting opportunities.

As far as Brazilian equities are concerned, investors seem to be holding on. This is reflected by the performance of the EWZ even in face of economic and political turmoil. Given that Mexican equities are quite expensive, and other sizable emerging markets from Latin America are few and far between, Brazil continues to find interest.

However, another impeachment in Brazil or related political turmoil could seriously dent confidence. Coupled with the fact that countries like Peru have shown potential, investor interest in Brazil can still flow to other countries in Latin America. In the broader emerging market universe, Brazilian equities seem to offer little to be excited about at this time.

Watchlist: 10 of the Largest Supermarkets in Emerging Markets

 

Stocks to consider

Since 2016, the MSCI Emerging Markets Food and Staples Retail Index has returned 19% while the MSCI Emerging Markets Index gained 31%. In comparison, the MSCI Emerging Markets Consumer Staples Index has surged 16.2%.

Large global retailers including Tesco (TESO), Carrefour (CA), and Amazon (AMZN) see opportunity for growth in emerging markets given supermarkets contribute tess than 50% of total grocery sales in large emerging markets like Brazil (EWZ), China, Russia (ERUS) and India. Further, experts see long term growth potential for stocks in this space given the high level of fragmentation in these markets with top five players occupying less than 30% of market share.

Chris Palmer, director of global emerging markets at Henderson Investment Management believes investors have opportunity to pick up stocks with low valuations that have potential for long term capital appreciation as well and growth prospects. He is bullish on Russian supermarket chain Magnit (MGNT) that operates 14,059 stores in nearly 2495 locations across Russia. Shares of the company have lost 24% YTD.

The biggest supermarket operators in emerging markets by sales are Walmart Mexico, Almacenes Exito SA, Cencosud SA, CP All, Cia Brasileira De Dis, Shoprite Holdings Ltd, Organizacion Soriana and Yonghui Superstores.By market capitalization, the largest supermarkets are Sumber Alfaria, Almacenes Exito, E-Mart, Cencosud and Hero Supermarkets.

In 2016, Wal-Mart de Mexico, Mexico’s largest retailer recorded sales of $28.6 billion, the highest among the supermarkets operating in emerging markets. The company, better known as Walmex operates 2,411 stores in Central America and has witnessed average sales growth of 8% in the past five years.

Shares of the company have gained 18.5% YTD. In comparison, the Mexican benchmark Index- Indice de Precios y Cotizaciones has gained 18% while the MSCI Emerging Markets Index (EEM) has retuned 16.8%.

Almacenes Exito also known as Grupo Exito, is South America’s largest supermarket chain, operating 2,606 stores in the region. Almacenes primarily operates in Colombia under the brands Exito, Carulla, Vivero, Surtimax, Seper Inter and Surtimayorista Bodega through a number of subsidiaries. The company also manages supermarkets under Libertad and Mini Libertad brand names in Argentina. Additionally they also run Disco and Devotoy Geant brand names in Uruguay. In 2016, the company recorded sales of $16.9 billion. Publicly listed on the Colombian Stock Exchange, shares of the company have gained 4.2% over the year so far.

Cencosud is the largest retailer in Chile (ECH) and the third largest in Latin America with nearly 1,045 stores in the region. The company operates supermarkets, hypermarkets and department stores across the Latin American continent. In 2012, the company acquired Colombian hypermarket operations of Carrefour and changed its branding to Jumbo. Last year the company generated sales worth $15.3 billion but its shares have lost 4.5% YTD.

CP All operates 7-Eleven and cash and carry stores under the brand Makro in Thailand. Thailand has the third largest network of 7-Eleven stores after the US and Japan. In 2016, CP All operated 9,542 7-Eleven stores across Thailand (THD). In 2016, the company recorded sales of $12.3 billion. Shares of the company have retuned 2% YTD but have 14% upside in the next 12 months as per sell-side analysts.

Shoprite Holdings is Africa’s (EZA) largest retailer, operating 2,653 outlets across 15 countries in the continent. The company generated sales of $9.02 billion last year and its shares are up 17.3% YTD.

Yonghui, is the 4th largest hypermarket operator in China, and has significantly outperformed peers in the supermarkets space. The company is also on the list of Forbes Global 2000 companies across the world. The company has sustained substantial market share gains in recent years and has recorded average sales growth of 26% over the past five years. The company operates a total of nearly 450 stores across China as of Sep 2016. In 2016, the company generated sales of $7.4 billion and its shares are up 47% YTD.

Valuations

Valuations within the supermarkets space have remained elevated, trading at 28.4 times its one year forward earnings. Comparatively, the MSCI Emerging Markets Index trades at a PE of 15.3x, while the MSCI Emerging Markets Food & Retail Index trades at 19.9 times its earnings.

Springland International, Cosco Capital, and Saudi Marketing are the most attractive stocks based on their cheap valuations. These stocks have one year forward PEs of 9.4x, 10.1x, and 12.9x and are trading at the steepest discount to their peers. Meanwhile, Sanjiang Shopping Club, Anhui Andeli Department and Avenue Supermarts are the most expensive supermarkets stocks in emerging markets with PEs of 110.2x, 67.6x and 61.4x respectively.

After Weathering the Storm Earlier This Year, What Will Drive Peru’s Stock Market?

In the first article of this series, we explored the stocks which have been holding back the broader stock market and exchange-traded funds investing in Peru. Meanwhile, the second article details issues facing the country and how it’s dealing with them.

So what do these components combined say about the outlook for Peruvian equities?

Short-term pain

Continued short-term pain for stocks from the country is likely, primarily due to reduced overseas investment in light of the ongoing investigations in the Odebrecht scandal involving previous administrations of the nation.

Meanwhile, investors would also like to see tangible signs of implementation of the government’s plan for rebuilding the country after being hit by severe floods earlier this year.

Another aspect which could hurt investment at least in the short-term is the political challenge faced by the country.

The government led by President Pedro Pablo Kuczynski is not yet a year old but has already seen three ministers – Jaime Saavedra (Education), Martin Vizcarra (Transport), and Alfredo Thorne (Finance) – being sacked by the congress. A similar fate probably awaits the Interior Minister Carlos Basombrío.

Thorne is the latest casualty in the $530 million Chinchero International Airport project contract matter which was also responsible for Vizcarra’s ouster. Kuczynski has named Prime Minister Fernando Zavala as Thorne’s replacement.

Political investigations such as this will continue to keep investors at bay for the short-term.

An economy with potential

Though the country is struggling to grow at present, it is considered to be among the most robust in Latin America.

Apart from the efforts the government is making to get the economy back on track and tackle the corruption scandal, it has another component which can help it bounce back — monetary policy.

The central bank reduced rates in May for the first time in over two years by 25 basis points, but held on to the 4% level at the meeting in June. Central bank President Julio Velarde has said that the institution will wait for the “right moment” to further reduce rates, preferably once credit demand is rising.

Outlook on equities

The table above lists the price-to-earnings (P/E) ratios of the ETFs tracking the five major emerging market economies of Latin America. While Brazil (EWZ) is the cheapest, Mexico (EWW) is the most expensive. Peru (EPU) is in the middle, between Chile (ECH) and Colombia (ICOL).

Peruvian equities may continue witnessing some headwinds in the short-term. Moderate risk-taking investors might want to wait for these headwinds to pass before initiating or adding to their stock holdings from the country.

However, more adventurous investors would find current valuations quite attractive and may initiate small buying positions. Those investors not taking the fund route need to steer clear of all firms which have connections to the Odebrecht scandal though.