Bargain Hunting in Brazil: Eight Ways to Give Your Portfolio a Vacation
by Tony D'Altorio, Investment U Research
Friday, July 2, 2010
Imagine a country with little debt... Now envision it has plentiful economic growth and boundless natural resources.
Sounds too good to be true in this lousy global economy, right?
Wrong. Because Brazil has all three.
True, it wasn't always that way. Plagued by hyperinflation, the nation hit a peak of 2,950% in 1990. Eight years later, it had to devalue its currency and ask the International Monetary Fund (IMF) for a $42 billion loan.
In January of 1999, its foreign currency reserves sat at a depressed $33 billion. And at the same time, another currency crisis drove interest rates as high as 45%.
But thanks to the anti-inflation policies of former President Cardoso and soon-departing President Lula, those problems faded away...
Interest rates fell to a low of 8.75% in 2009. Foreign currency reserves were recorded at $235 billion this February. And in the midst of the global financial crisis, Brazil even loaned the IMF $14 billion to boost its dwindling coffers.
Talk about the shoe being on the other foot...
Even better, the party that started in March 2009 is still going strong. Investments in Brazilian stocks are poised for even further gains as its economy continues to make progress.
Brazil's Economy & Asian Growth
Brazil barely blinked at the global financial crisis thanks to the Asia-driven commodity boom.
After a short and shallow recession, it now expects GDP growth of 8-10% this year. It has a net debt of only 42% of GDP. And foreign debt has fallen to 4% of GDP, envious levels for much of the world. In addition, Brazilian banks are very well capitalized, with credit growing about 18% in April.
Last October, the Brazilian central bank imposed a 2% tax on short-term capital inflows to actually try slowing things down. But it made little difference; the local currency continues to strengthen.
Brazil's middle class - households with a monthly income of $610 or more - keeps growing too. From 2004 and 2008, poverty levels fell from almost half of the 192 million population to about a quarter. During that same time, roughly 10 million Brazilians joined the middle class.
Unsurprisingly, that shot retail sales up by 30% in March alone.
Stepping Up for The 2014 Olympics & World Cup
Brazil is hardly sitting back and enjoying its gains though. Leaders there realize the country's infrastructure desperately needs work. So they plan to spend $500 billion on infrastructure by 2014 in preparation for the Olympics and the next World Cup.
The country's growth also has profound global economic consequences. Its newly minted, middle class consumers have created an international market worth investing in.
Right now, Brazil is poised to overtake Germany as the world's fourth largest vehicle market. Even as the U.S. hit a 27-year low in that department last year, Brazil's sales grew 11% to 3.1 million. And while most U.S. car plants are working below capacity, their rivals in Brazil are operating 24-7.
Despite struggling for profitability at home for the last decade, Ford (NYSE: F) reported 25 quarters of profits in Brazil... in a row! And even General Motors is doing well there.
Still, even with their successes, the real story lies in the companies that call Brazil home.
Eight Ways to Begin Looking to Brazil
There are a large number of individual Brazilian companies that trade on U.S. exchanges in the form of American Depository Receipts (ADRs).
Some of the best of that bunch include:
- Beverage giant Ambev ADR (NYSE: ABV)
- Food and meats company Brasil Foods ADR (NYSE: BRFS)
- Airline company Gol Linhas Aereas ADR (NYSE: GOL)
- Retailing company Companhia Brasileira de Distribuicao ADR (NYSE: CBD)
And as usual, investors can rely on a few well-placed ETFs with large portfolios of Brazilian stocks. Of them, iShares MSCI Brazil Index (NYSE: EWZ) and Market Vectors Brazil Small-Cap (NYSE: BRF) look particularly good.
Also, the newer EGShares Brazil Infrastructure (NYSE: BRXX) includes many Brazilian companies working on the country's planned $500 billion infrastructure build-out. And Global X Brazil Mid-Cap (NYSE: BRAZ) looks good as well.
Those baskets of goodies look even better considering that Brazilian ETFs are down year-to-date. EWZ has even fallen 15%, creating a great buying opportunity.
And let's face it. With the way traditional markets are looking these days, western-based portfolios can use the vacation.