Fund firm Armstrong bullish on Brazil boom

LONDON (Reuters) - Fund firm Armstrong Investment Managers AIM.L is betting Brazil's booming economy will continue to boost its stock market, even though several hedge funds are taking the opposite bet on fears of a slowdown.

Managing partner Patrick Armstrong has upped exposure to Latin America's largest economy by raising his holding in a stock market exchange-traded fund to 5.8 percent of his Diversified Dynamic Solution fund, while food processor Brasil Foods (BRFS3.SA) has been upped to 3 percent.

He cites the cheap valuation and attractive dividend yield of Brazil's Bovespa .BVSP index -- currently on a forecast price/earnings ratio of 11.8 times with a 2.8 percent yield -- in the light of strong drivers of growth.

"It's our preferred BRIC (Brazil, Russia, India and China) by far," Armstrong told Reuters in an interview on Friday. "It's got a lot of things working for it."

"It's got strong economic growth ... The demographics are in favour, there's been no banking crisis, the current account is balanced and it's a commodity-backed economy."

The Bovespa, one of the world's best-performing stock markets since the credit crisis, has more than doubled since its November 2008 low, boosted by a shallower recession than many developed economies and expectations of strong growth this year..

However, not all hedge funds are convinced.

Pedro de Noronha, managing partner of Noster Capital, told Reuters earlier this month he had begun shorting a Brazil stock market exchange traded fund, saying the market had become a very popular trade, but would be badly hit if China's economy stumbles.

And managers at global macro hedge fund firm Onslow Capital told Reuters last month they were short Brazilian bonds because they believe prices more than reflect the strength of the country's economy.

DIVIDENDS

Armstrong, who was co-head of Insight Investment's $2 billion multi-asset unit before setting up AIM last year, also sees an opportunity in European equity dividend swaps -- derivatives that let an investor buy or sell dividends paid by the underlying stocks.

Swaps on dividends to be paid in 2013, 2014 and 2015 now account for around 10 percent of his fund, as he believes selling pressure from proprietary trading desks and structured product providers has pushed their value too low.

"(The) 2015 dividends (swap) is trading at 99. It got to 82 at the beginning of July, but it's still very cheap," he said.

"By 2015 the consensus is 198. I wouldn't be surprised if the consensus isn't achieved, but there's enough leeway in there (for it to be attractive anyway)."

Armstrong added he owns exchange traded funds on physical gold, silver and platinum accounting for 5.1 percent, 2.5 percent and 1 percent of his fund, to give protection against "the eroding purchasing power of the U.S. dollar".

Gold has soared in value since the credit crisis to hit a record high of $1,264.90 an ounce in June as investors sought a safe haven against quantitative easing, but some hedge funds are sceptical.

Salus Alpha told Reuters this week that gold was "hugely overpriced" and could provide an opportunity for short-sellers. (To read the Reuters Funds Blog click on blogs.reuters.com/fundshub; for the Global Investing Blog click here)