Find long-term profits in Brazil
Aug 20, 2009
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Brazil: knocking the spots off more developed markets
Even if you believe, as I do, that Asia will be generally the best place to find investment profits over the long term, it makes sense to diversify internationally. Brazil is a good place to look.
According to the latest figures I have to hand, Brazil has been one of the best-performing stock markets this year, with a 76% rise in dollar terms in its benchmark index. Comparable figures are China 89%, Indonesia 80%, Chile 59%, India 58%, Russia 54% and South Africa 29%.
Developed markets have done really poorly by comparison. The US and Japan are up just 8%, Germany 11%, Britain 17%.
After a sizzling 8% growth last year, the Brazilian economy is riding out the global recession with comparatively little discomfort. The OECD forecasts a contraction of just 1% this year, with a rebound to 4% growth next year.
It says in a new study just released that Brazil's resilience to the global downturn can be attributed to sound policies such as inflation targeting, a floating exchange rate and prudent management of public finances.
Brazil has avoided major blows such as the collapsing banking and property bubbles in the US and Britain, the collapsing export markets for capital goods suffered by Germany and Japan.
Its banking system is well-capitalised and fundamentally sound. For example, banks have to hold large reserves at the central bank such as 25% of their savings account deposits. Interest rates remain relatively high – the most popular government savings scheme pays nearly 9%.
It has enjoyed 15 years of responsible economic management under centrist governments, so it faces the challenges of recession with a national debt of only 40% of GDP and a budget deficit of only 2.5%.
It can be argued that Brazil is the ultimate resources play, as its scale, scope for expansion and above all diversity outclass alternatives such as Australia or Russia.
Its Vale company is the world's biggest exporter of iron ore, while Petrobras has discovered oil and gas reserves under Atlantic waters so vast that they could turn Brazil into the world's fourth biggest producer.
Already the biggest supplier of internationally-traded foodstuffs such as sugar, soybeans, coffee, corn, poultry, beef and orange juice, it has a greater potential for growth than any other. It has large amounts of unused fertile land, a warm climate and above all abundant water. It contains nearly a fifth of the world's fresh water.
However, Brazil is also a domestic-demand play. Recently the strongest stock-market performers have been real-estate companies such as Rossi Residential, telecoms firms like Telemig Cellular, and consumer-products enterprises such as Cia de Bebidas das Americas and Souza Cruz.
Many more prosperous Brazilians
Its population of 192 million, with an average GDP per head of $8,210, includes a fast-growing middle class which – depending how you define "middle class" – is said to be five times larger than India's.
However, like any other country, Brazil has some significant negatives to discourage international investors.
Its public sector is bloated and corrupt, packed with time-servers with jobs for life and fat pensions to look forward to. Taxes to pay for it gobble up more than a third of national output – a proportion higher than in other emerging markets and out-of-proportion to the low quality of services provided.
There are serious infrastructure problems, and highly restrictive labour laws.
Nevertheless, argues the FT's Jonathan Wheatley, Brazil "Is a mature democracy with a diversified economy, a young, adaptable population revelling in increasingly stable employment and rising incomes. It is also a rising power in food and industrial commodities, a big future exporter of oil, and home to the world's fourth biggest derivatives and equities exchange."
Individual investors without the knowledge and resources to stock-pick, who nevertheless would like to have a stake in Brazil's long-term future, would probably do best buying units in one of the exchange-traded funds listed in London or New York.
• This article was written by Martin Spring in On Target, a private newsletter on investment and global strategy. Email Afrodyn@aol.com to be included on the recipient list.
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