Aberdeen Asset Management, which runs a successful emerging markets strategy, has allocated more money to onshore Brazilian bonds following the repeal of a
punitive tax.
In June the Brazilian government withdrew a tax on foreign investors, known as the IOF tax, which levied a 6% one-time upfront payment on new bond purchases.
The tax was introduced in 2010 to stem large inflows to Brazil’s fixed income market.
Aberdeen, which itself has had to take measures in recent months to stem flows to its popular emerging market strategy, has repositioned its Brazil bond fund by significantly increasing its exposure to onshore bonds which yield between 9% to 11%.
The $77 million (€58 million) Aberdeen Global – Brazil Bond Fund’s portfolio was previously heavily skewed towards floating rate notes, but the team now sees more relative value in nominal and inflation-linked bonds.
The team has also bought onshore bonds for their flagship £2.6 billion (€3 billion) Aberdeen Global – Select Emerging Markets Bond Fund.
Aberdeen says the change in tax policy has been a result of the authorities recognising that the country’s balance of payments and inflation dynamics are no longer favourable, and that change is necessary to help stop the Brazilian real from further weakening.
It is hoped that the removal of the tax will see an increase in foreign inflows and an appreciation of the currency as yield hungry investors seek to buy onshore bonds in a “lower-for-longer” global rate environment.
Brett Diment, Head of Emerging Markets & Sovereign Debt at Aberdeen Asset Management, says: “The Brazilian Central Bank’s renewed commitment to fight inflation is encouraging.
The removal of the IOF tax is also welcome and a move we see as being advantageous for the Brazilian real and foreign investors given the country has some of the highest real interest rates
available.
“The yields available in the fixed income market are now at a significant premium to those offered by fiscally challenged G-7 nation bonds.”
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