A Brazil turnaround is on the way: Fixed income expert

The benefits of investing in EM

Confidence in Brazil's economy is returning, with bond and stock markets starting to climb, heralding the start of a turnaround for the Latin American country, experts have told CNBC.

Brazilian fixed income has been one of PineBridge Investments best performers this year, said Steve Cook, co-head of emerging market fixed income at the company. Morgan Stanley data showed Brazilian corporate bond prices have risen 4 percent over the last month and outperformed nearly all other emerging market corporate debt, according to a Dow Jones report, while the price of Brazil's government bonds have risen 13 percent.

"We think part of the performance this year has been Brazil's risk reduction," Cook told CNBC's Squawk Box.

"The Brazilian sell-off last year was overdone. Still, they are a challenge but we think Brazil is in a much better position now. We think it's more of a turnaround story: there are reforms coming through."

Christ the Redeemer during sunrise in Rio de Janeiro, Brazil, August 2, 2016.
Kai Pfaffenbach | Reuter

More broadly, emerging markets have performed well in 2016. UBS said in a report that economic growth has improved in the first two quarters of 2016 and that Brazil's gross domestic product (GDP) growth showed decent improvement.

"Emerging market equities are now up just under 12 percent on the year compared with 3.4 percent for developed markets. LatAm equities are the stand-out performers … Brazil alone has contributed to just over a third of the year-to-date rally," UBS strategists Bhanu Baweja and Manik Narain said in a research note published last week.

However, there are still some concerns about Brazil's economy, especially its export-led growth.

"The difficulty in relying on export growth for Brazil is that it depends on the economy being relatively competitive internationally," said Ayesha Akbar, portfolio manager at Fidelity International in a research note.

"Outside the commodity sector, Brazil has few advantages, bringing us back to the need for structural reform to enhance competitiveness and the unlikelihood of this happening until a President with a reform mandate is democratically appointed."

Hunt for yield, but be cautious

The hunt for yield has been a major driver of investment into emerging markets, according to Cook, but he warned against simply buying across the emerging market and encouraged investors to diversify, as foreign exchange movements could create problems.

"If the dollar resumes its rally, EM currencies will weaken. Not across the board but certain countries that are in more vulnerable positions will sell-off more," he said.

"Don't just buy the market. There are pockets of opportunity. There are pockets of vulnerability as well."

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