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Buy Into Brazil

October 13th, 2009

forbes_home_logoThere’s a lot to like about South America’s biggest economy. Hosting the Olympics and World Cup doesn’t hurt either.

Suddenly everyone is talking about Brazil. This makes sense considering that the colossus of South America out-hustled President Obama and his hometown of Chicago to land the 2016 Olympics. It has also benefited by being the “B” part of the BRIC group of emerging nations, in addition to Russia, India and China. It’s an emerging power that some investors have just learned about, though the pros have been hip to it for some time.

From 2003 through 2007, Brazil ran record trade surpluses, and its gross domestic product, at $1.99 trillion, is the 10th largest in the world. It has large and well-developed agricultural, mining, manufacturing and service sectors, and its economy is bigger than all other nations in South America combined. Brazil is expanding its presence in world markets and, as we have seen, the world’s playing fields.

There are also some significant drawbacks to Brazil. Despite its potent GDP, rampant income inequality means that its per capita wealth is 102nd in the world, slightly behind the global average and noted powerhouse Serbia. Brazil’s richest 10% reaps 43% of its wealth; in the U.S. that number is 30%. Brazil’s bottom 10% earns a minuscule 1.1%.

Still, there is a lot to like here, and our industry observers are ready to buy.

David Joy, chief market strategist for RiverSource Investments, says that the Olympics represent not just a feather in Brazil’s cap, but an implicit stamp of approval for its economic development. This means that Brazil, and its BRIC brethren, deserve not only a seat at the table when global economic issues are being discussed but that they are central players in such discussions.

Joy recommends buying into materials producers that have benefited from growth in the Pacific Rim; consumer services that benefit from the nation’s growing middle class; and into the nation’s debt, which has benefited from sound fiscal and monetary management at the government level. He also likes the nation’s strong currency. In the mining world, he likes mega-firm Vale S.A., with a market cap of $131.8 billion. Year-to-date, its stock is up 37.4%. It should also be noted that the stock is trading at the roof of its 52-week high, and with a price-to-earnings ratio of 26, it’s somewhat expensive versus the larger market. Still, with hard commodities on the warpath, there is little evidence that its run will end abruptly, or soon.

Joy also recommends steel-mining firm Companhia Siderurgica Nacional  and Petroleo Brasileiro SA, widely known as Petrobras. The latter has a market cap of $211.8 billion, with a P/E ratio of 14.3.

Greg Ghodsi, the head of the 360 Wealth Management Group at Raymond James, is also a fan of Brazil. He says the nation’s recent economic coming-out mirrors in some ways its play on the soccer fields. For years it would produce some of the world’s great players, but they would have to leave the country in order to make a living. Now, with Brazil emerging in its own right, some of that talent is staying home. Ghodsi points to the Olympics as a key turning point for the nation but says that its hosting of the World Cup in 2014 is slated to be an even bigger deal.

“Brazil is resource rich and can produce their energy needs,” he says. “The equity markets are volatile, but it looks an area of the world that I would want to have some exposure to. Since 2002, our portfolios have had Latin American exposure ranging from 5% to 15%.”

If you are a retail-level investor, an exchange-traded fund could be the easiest and most headache-free way to get into Brazil. Here, the leading name is the iShares MSCI Brazil Index ETF. Ghodsi, for one, uses it. “I hesitate to recommend individual names for the emerging markets because of volatility,” he says. “Our group believes in using ETFs as the core of the portfolio and adding some individual names to overweight areas that have string relative strength readings.”

Bill Singer, shareholder of the law firm Stark and Stark, is also up on Brazil and its ETF. While he notes that Brazil has its drawbacks–such as staggering poverty–it appears to have finally made its way through its past problems and has built an impressive technology sector to complement its heavy industries. “Moreover, under its left-leaning government of President Lula Brazil, it has emerged as an oasis of stability in the Western hemisphere and has thrived during a worldwide recession,” he says.

Indeed, this good health has been reflected in the Brazil ETF, which is up 108% year-to-date, even as U.S. markets have risen 19%. The fact is those who have only hugged the domestic shores during the past year have missed out, big.

Still, the ETF is far from perfect. One problem is that Petrobras and Vale S.A. are such towering presences in Brazil’s economic landscape that they dominate the ETF. Together these make up 38.1% of the index–an astonishing degree of power for two firms to have on one nation. Should commodities prices plummet, which could happen in a deflationary spiral, it would almost certainly take the ETF–and, worse, Brazil–down with it.

For those looking to invest in individual names but who don’t want to over-concentrate on commodities, you could also consider investing in Brazil’s financial firms. Some names to consider here are Itau Unibanco Banco Holding SA  and Banco Bradesco. Shares of both are strong in 2009, up over 50%, and both are extremely well-capitalized. Itau has a P/E ratio of 18 and Bradesco’s is 20.

By David Serchuk

http://www.forbes.com


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