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Ariel’s $7 Billion Stock Picker Scoops Up Bargains in UK, Brazil

·3 min read

(Bloomberg) -- Stocks that offer a steady stream of income to investors will stand out as central banks continue to raise interest rates, with opportunities emerging in the UK and Brazil, Rupal Bhansali, chief investment officer of global equities at Ariel Investments.

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Both countries “look especially out of favor and cheap to us, and offer good opportunities for bargain hunting,” Bhansali, who oversees about $7 billion at the firm in New York, said in an interview. “I have been favoring high-dividend yielding stocks in sectors that have resilient business models and strong balance sheets.”

Bhansali is “very underweight” the US as the stock market is “over-owned and overvalued,” while Europe is currently her biggest exposure. Pharmaceutical companies including Roche Holding AG, Sanofi and GSK Plc are among her top picks, she said.

“A lot of innovation in the health-care sector has gone unnoticed, such as game-changing therapeutic cures for chronic diseases and the rise of robotic surgery,” Bhansali said. “The industry gives you the combination of innovation and growth, but also with superior profitability.”

Some of the portfolios that Bhansali manages have a “high single digit” percentage exposure to Latin America, even as the region grapples with heightened political volatility. The money manager favors non-commodity names, especially in Brazil. Two years ago, only 1% of her holdings comprised of Latin American companies.

“People are overly concerned about politics and the fiscal situation in Brazil. That is not to say that I’m not, but when the risk is already in the price, it’s OK to take that risk,” she said. “The political volatility that may follow in the next months may create opportunities and we want to be ready, should that happen.”

Latin America’s largest economy will hold presidential elections in October, with former leftist President Luiz Inacio Lula da Silva ahead of incumbent Jair Bolsonaro in opinion polls so far. Lula has called for a potential review of recent economic reforms, while Bolsonaro has accelerated public expenditure as he seeks to boost approval ratings before the vote.

“The higher fiscal deficits are here to say and unfortunately the checks and balances in the system have been removed, which is problematic,” Bhansali said.

Still, the ability of Brazilian firms to thrive despite a volatile macro backdrop should counter the negative impact of high interest rates, which make fixed-income products more appealing to locals, she said.

Brazil’s key Selic rate, which is the country’s benchmark interest rate, at 13.25% “has led to redemptions in the local fund-management industry, forcing many local funds to sell,” Bhansali says. “But, ultimately, when the market becomes too cheap, foreign investors like us will come along.”

Opportunities in Brazil may emerge in sectors such as retail, finance and transportation, she says. Insurer BB Seguridade has already been added to Bhansali’s portfolio on its “attractive trifecta” of earnings growth, high dividends and a strong capital position. Outside Brazil, Bhansali likes Peru and Chile, while Mexico “is a little bit too rich” at current levels.

‘Lost Decade’

The MSCI ACWI Index is down 19% since peaking last November as fears intensify that policy makers will continue to be more aggressive about raising interest rates to bring inflation under control, which could throw the global economy into a recession. These concerns have spurred firms including Citigroup Inc. to tell clients to favor defensive names in countries such as the UK.

“Valuations in general are so rich across the globe that I expect to see a lost decade in equity-market performance,” said Bhansali. “In the past, whenever we had a lost decade, dividends tend to play a very important role in delivering total returns,” she said, citing cycles that started around 1969 and 2001.

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