Investing in Brazil: Two Ways to Profit From This Emerging Market's Multiple Growth Trends
by Tony Daltorio, Investment U Research Team
Monday, January 11, 2010
Soccer... the Samba... and carnivals.
These are the things that spring to mind when you mention Brazil.
But these days, the country is increasingly considered an excellent destination for investment capital, too. In fact, it may very well become one of the 21st century's new economic powers, alongside places like China and India.
The solid economic foundation is already in place...
~ Commodities: Brazil holds a strong position in commodities like sugar, iron ore, soybeans, orange juice, pulp, paper, and now even oil.
~ Structural Reforms: The country has worked diligently towards structural reforms in recent years - and through improved fiscal and monetary policies, it's achieved a noticeable improvement. That includes...
- Lowering inflation.
- Reducing net debt to 40% of GDP.
- Paying off its International Monetary Fund loans.
- Aggressively boosting its foreign reserves to $200 billion.
- Achieving an investment grade rating for its debt.
~ A Stricter Central Bank: Brazil's central bank has moved toward more conservative policies. Among them...
- The current interest rate is 8.75% - a full 4% above the 4.5% inflation rate.
- Brazil's banks are requiredto keep 30% of all deposits with the central bank, plus capital reserves of at least 11% of total assets, when most financials outside the country maintain capital ratios of 16% or more
~ Increased Energy Independence: For decades, Brazil has worked hard to boost its energy independence - a strategy that is now paying off big-time. Not only did the nation become self-sufficient in oil last year, it also discovered the world's largest oil and gas reserves in decades. This improves its chances of becoming a major oil exporter, given that Brazil already derives much of its own electricity from hydro energy and powers many of its cars with sugar cane ethanol.
And speaking of independence, Brazil draws also draws economic strength from the fact that much of its growth comes from within. A mere 13% of its growth comes from foreign trade, which largely consists of commodity exports to China.
Last In... First Out
Resilient Brazil was the last Latin American country to enter economic recession... but the first to exit from it. Not only that, the country has emerged from the global downturn in better shape than many other countries and estimates call for GDP growth to fall between 4.5% and 5% this year.
In terms of the job market, Brazil has more than made up for the 800,000 jobs it lost during the economic crisis by adding one million jobs over the past six months.
Brazil's middle-class is growing, too - a trend that is significantly aiding growth. Between 2001 and 2007, Brazil's poorest 10% enjoyed a 49% jump in real income. And with half of Brazil's 200 million population now considered "middle class," credit card purchases have jumped by 22% a year over the past decade. Auto sales hit a record high of 300,000 in June 2009.
And the fact that Brazil will play host to the world's two biggest sporting events in the coming years - the 2014 soccer World Cup and 2016 Summer Olympics - should also give a major boost to the economy.
So how do you go about investing in Brazil?
Two Ways to Cash In On Brazil's Economic Evolution
Did you know that the world's biggest stock market listing of 2009 came from Brazil?
There's no doubt that Brazil has matured as a country - and is rapidly moving towards becoming a major force in the global economy.
Investors can easily invest in Brazil's "coming of age" through two broad-based, exchange-traded funds (ETFs):
- iShares MSCI Brazil Index (NYSE: EWZ): This invests in mostly large-cap financials and commodity stocks such as Petrobras (NYSE: PBR) and Vale (NYSE: VALE).
- Van Eck Market Vectors Brazil Small-Cap (NYSE: BRF): This fund offers exposure to Brazilian small-cap stocks with big potential - a great way to play Brazil's rising middle-class population and higher consumer consumption rates.