Download One-on-One with Jose Cuervo - HSBC Global Asset Management

One-on-One with Jose Cuervo
HSBC Global Investment Funds – Brazil Equity
March 2011
For professional clients only
Jose Cuervo, Manager of HSBC GIF Brazil Equity Fund
Jose Cuervo is a fund manager in the global emerging markets equity team and has been working in the industry
since 1996. Prior to joining HSBC in 2000, Jose completed the HSBC Global Graduate Program after working for
Phillips, Hager & North Investment Management Ltd. He holds a Bachelor of Commerce degree with a Finance
specialisation from the Faculty of Commerce, University of British Columbia, where he was a member of the UBC
Dean of Commerce Portfolio Management Foundation. He is a CFA charterholder.
Q: What impact is the political unrest in the MENA region having on the Brazilian market?
A: At the moment, it is difficult to make a link between the overall Brazilian market and the situation in the Middle
East. Brazilian equities have been weak during the past two months, on the back of uncertainty about local
interest rates and government policy. Global conditions have had a lesser impact on equities. Brazilian
sovereign spreads and the domestic currency does not appear to be tracking oil prices with spreads rangebound since the beginning of the year, and the currency improving gradually.
One impact that can be seen relates to Petrobras, which has continued to outperform and, given its large
index weighting, has facilitated an improvement in equity markets.
Q: The IMF recently described Brazil’s fiscal account as “particularly pronounced” and predicted the deficit to
grow – a statement strongly contested by Mantega. What are your thoughts on this?
A: The fiscal deficit in Brazil will be problematic in the near-term future. The most important sub-components of
the budget are linked to wages - retirees as well as current government workers - and these areas have seen
a significant increase given rising wages and employment. As these areas are structurally difficult to cut back,
GDP will be required to outgrow these outlays for the deficit to be reduced. The spending reductions so far
announced by the government show a willingness to reduce spending, but in themselves, they are unlikely to
amount to a large reduction in spending. As such, we are more likely to side with the IMF in worrying about
the size of the deficit.
Q: What kind of relationship does Brazil currently hold with China? How can Brazil benefit from a strong
bilateral partnership?
A: Until recently, the relationship has been fairly quiet with no specific policies driving the relationship. However,
in the recent past, rising imports of Chinese goods into Brazil, as well as increased interest from China in
Brazilian resources, have created a new dynamic. For the most part, Brazil has been somewhat relaxed to
allow China to invest in raw material projects, but increasingly, politicians are starting to worry about
increased exposure to Chinese investments. On the one hand, Brazil would like to increase the value added
of raw material exports and on the other, it does not want to increase exposure to one particular buyer and/or
investor. As such, the country is looking at ways to limit, but not block or eliminate, Chinese influence on
Brazilian raw materials.
On the other hand, Brazil is increasingly voicing its concerns on the weak Chinese currency which is leading
to higher imports of Chinese goods into Brazil and competing with local industry. Uncharacteristically, Brazil
is siding with the US in attempting to limit China’s attempts to keep its currency weak.
Q: The Fund holds a large allocation to financials – how is the industry currently performing? Do valuations
remain attractive?
A: The Fund is currently underweight financials, speaking about banks specifically. We hold 20% versus 26.3%
for the index. The underweight is due to continued concern about reserve requirement and other macroprudential measures being announced regarding banks (to reduce lending and hence slow down the
economy) that may reduce profitability.
However, if we include the real estate sector in financials, we are currently about flat relative to the index
holding of 26.5%. We are double the weight in real estate relative to the index. We like real estate as related
stocks have been driven down in price on the back of rising interest rates, while we believe that, for the most
part, these interest rate increases will have a low impact on company operations, given the nature of home
building in Brazil, the source of funding and the specific programmes in place to fund the industry.
As such, we see valuations in real estate as very attractive, while in banks we see valuations as only
marginally attractive, but with downside to stocks as more policies are announced.
Q: Within the Fund’s investment process, can you tell us more about your risk monitoring systems?
A: Risk is monitored in the Fund at different levels.
Risk is monitored relative to the benchmark in terms of the portfolio deviation versus the benchmark. This is
done at the country, sector and stock-specific level. We manage the Fund to ensure all deviations are
understood and intended. Risk is also measured against restrictions placed on the Fund, both by the overall
HSBC Global Investment Fund (HGIF) board of directors as well as Luxemburg rules and any internal
restrictions. The two major risk parameters are the 5/10/40 rule and the maximum tracking error of 15%. We
also measure risk in terms of the exposures to different parameters such as company size, liquidity,
currencies, commodity inputs, politics, regulatory changes, etc. These are analysed at the security level, as
well as the overall portfolio level.
The above are risk checks done primarily at the fund manager level. Independent of the fund managers, there
are various risk parameters checked by the HSBC Risk team and the HSBC Compliance team, as well as by
specific reporting done on behalf of the Global Equities CIO.
A monthly report is generated independently of the fund manager and reviewed by the Global Equities CIO.
In it, the report highlights a range of risk measures to ensure management have a strong oversight of the
Fund’s construction. With the introduction of our new trading system, Charles River, the risk function will be
enhanced both as a measurement tool as well as a prevention of breach rules.
Finally, the custodian, Dexia, also performs various risk assessments, such as concentration of positions and
overall exposures of the Fund to specific companies total share capital.
This document is intended for professional clients only and should not be distributed to or relied upon by retail clients. The views expressed above were held
at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way.
HSBC Global Asset Management (UK) Limited accepts no liability for any failure to meet such forecast, projection or target. HSBC GIF Brazil Equity is a sub-fund of
HSBC Global Investment Funds, a Luxembourg domiciled SICAV. UK based investors in HSBC Global Investment Funds are advised that they may not be afforded
some of the protections conveyed by the provisions of the Financial Services and Markets Act 2000 ("the Act"). HSBC Global Investment Funds is recognised in the
United Kingdom by the Financial Services Authority under section 264 of the Act. The securities representing interests in HSBC Global Investment Funds have not been
and will not be registered under the US Securities Act of 1933 and will not be offered for sale or sold in the United States of America, its territories or possessions and all
areas subject to its jurisdiction, or to United States Persons, except in a transaction which does not violate the Securities Law of the United States of America. All
applications are made on the basis of the current HSBC Global Investment Funds Prospectus, simplified prospectus and most recent annual and semi-annual reports,
which can be obtained upon request free of charge from HSBC Investments (UK) Limited, 8 Canada Square, Canary Wharf, London, E14 5HQ, UK, or the local
distributors. Investors and potential investors should read and note the risk warnings in the prospectus.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Where overseas
investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their
nature higher risk and potentially more volatile than those inherent in established markets. This sub-fund invests predominantly in one geographic area; therefore any
decline in the economy of this area may affect the prices and value of the underlying assets. Stockmarket investments should be viewed as a medium to long term
investment and should be held for at least five years. Any performance information shown refers to the past and should not be seen as an indication of future returns.
HSBC Global Asset Management (UK) Limited provides information to Institutions, Professional Advisers and their clients on the investment products and services of the
HSBC Group. This document is approved for issue in the UK by HSBC Global Asset Management (UK) Limited who are authorised and regulated by the Financial
Services Authority. Copyright © HSBC Global Asset Management (UK) Limited 2011. All rights reserved. 20085/0311 FP11-0414