beyondbrics

Eighty per cent of the world’s consumers live in emerging markets, creating a huge pool of customers for all those companies looking to sell goods and services. That’s why most fund managers bet on consumer groups last year – and were repaid handsomely as domestic demand soared.

Given the success of that strategy, HSBC has stuck its neck out in a note announcing it’s betting on commodities and infrastructure in Brazil over the popular consumption story in 2011.

Why is the bank going against consensus? While many have argued that consumer growth in markets like Brazil is a stable, long-term trend, especially compared to the volatility of commodity prices, HSBC focuses on Brazil’s inflation fight, which it calls “the key investment theme” of this year.

“As we enter 2011, the BCB and the Brazilian government have taken the first steps to tame the inflation dragon”, write Alexandre Gartner and Francisco Machado in Wednesday’s note.

Following on the heels of last week’s rate hike, HSBC sees a 75bp hike in March followed by another 50bp rise, bringing rates to 12.5 per cent.

The brunt of the squeeze will be borne by individuals, the bank says:

As inflation continues to grow (until these measures take effect), families will see their disposable income get compressed, further slowing consumption and possibly putting some pressure on credit delinquency.  .  .  . We expect private consumption to decelerate strongly in the first and second quarters in response to the above-mentioned measures and also as a consequence of tighter family budgets due to high inflation.

That decline will hit consumer groups, retailers, homebuilders and financials – the very groups that have been booming during Brazil’s credit expansion – and HSBC is clear: “We believe investors need to rotate out of some very popular sectors.”

Meanwhile, the bank identifies “very positive early signs that the new government will have a strong focus on the execution of key infrastructure projects” in support of its upbeat view on highway concessions and steel producers.

Add to that a “bullish” outlook on commodities and expectations of a recovering US economy, and it’s not hard to understand why HSBC is adding Gerdau, the steelmaker, and Petrobras, the state-controlled oil company, to its preferred stock list, where they join iron ore giant Vale, highway operator CCR and agriculture group SLC.

HSBC does keep one domestic play on its list: Odontoprev, which sells dental insurance. “We expect growth to be delivered in spite of a slowing GDP”, since the company recently struck a deal to provide plans to banking giants Bradesco and Banco do Brasil.

But ultimately, HSBC sees the picture changing – “we understand that we are in a transition period from consumption to investment and we expect more incentives in favor of the latter in detriment to the former” – and is putting its money where its mouth is.