Is there a place in the world unaffected by the recent economic calamities? With many of the first world economies broken, which one is the safest, freest and the most rewarding? Where one can safely park a lifetime's worth of savings? U.S. bonds used to be a safe heaven in times of uncertainty. But growing U.S. debt and record low interest rates prompt one to look for alternatives.
Brazil Investing: The Opportunities
Let's take a look south of the border, at the largest country in South America. Ranking first in GDP is Brazil.
Brazil is the world's fifth largest country, both by geographical area and by population. It has the lowest external debt, (but also the largest percentage of public debt) among South American countries. Home of the 2014 FIFA soccer world cup, and of the upcoming Olympics in 2016, we expect the world news interest to be focused on Brazil in the near future.
The Brazilian economy is the world's sixth largest by nominal GDP and the seventh largest by purchasing power parity. It has been predicted to become one of the five largest economies in the world in the decades to come.
Recently, Brazil has enjoyed a vigorous economic growth by far outpacing that of China (Fig. 1). One dollar invested at the end of 2002 in Brazil's Bovespa (IBOVESPA) index would be worth 8.6 dollars today. That is compared to 2.6 dollars in the China Shanghai 180 index, and 1.6 dollars in the S&P500 (SPY) index. Brazil is now self-sufficient in oil and many other products, and has achieved a positive trade balance. It may yet become an oil exporter, when and if its deep sea deposits are drilled. The inflation rate in Brazil was recorded at 5.45 percent in October of 2012. It is expected to slow to 4.5 percent next year.
One would think that being self-sufficient, Brazil is relatively insulated from the current world economic crisis. Still, in the height of the 2008 crisis, the Brazilian stock market dropped 60 percent, more so in U.S. dollar value due to the decline in the Brazilian Real at the same time. It then quickly recovered -- more quickly than the U.S. and China -- as foreign money flowed in (Fig.2). But instead of welcoming the influx of cheap money, the wise men of Brazil slapped a tax on foreign investors. This is one of the caveats on investing in Brazil, although the government repealed this tax after the market dropped again in 2011. More on this later on.
The chart in Fig. 2 shows two different views of the Bovespa: the blue line is for the Brazilian investor in Reals, the green line is for the U.S. dollar investor. As one can see in relative terms, the Brazil market was discounted (cheap) in U.S. dollars for most of the time, except for in April 2008, just before the big market plunge, and another one in 2010-2011, before the second plunge. Due to exchange rate differences, the timing of the entry and exit can make a huge difference in the U.S. dollar returns.
Brazil Products And Markets
Brazil has the second biggest industrial sector in the Americas. Brazil's diverse industries range from automobiles, steel and petrochemicals to computers, submarines, aircraft and space research (International Space Station ISS) and consumer durables. It is also a pioneer in many fields, including ethanol production and short-fiber timber cellulose.
It supplies 25 percent of raw cane and refined sugar demand. It is the world leader in soybean exports, and is responsible for 80 percent of the planet's orange juice. And since 2003, it has had the highest sales figures for beef and chicken among the countries that deal in this sector.
It's the fifth cacao-producing country in the world. It is also the 20th in chocolate consumption, with 2.25 lbs/year. It is the only country on the list that actually considers chocolate to be a natural resource. With a population of over 190 million, Brazil is one of the 10 largest markets in the world. And as the wealth inequality gap is getting narrower, its buying power will be increased. No wonder Cadbury is trying to adjust its chocolate recipe to Brazil's hot climate.
Brazil Investing: The Risks
There are risks to investing in Brazil. It ranks 99th in the world in the economic freedom ratings, placing it in a "mostly unfree" group, between Serbia and Egypt. Like in many developing countries, and the BRIC group among them, the governments don't often know the difference between private capital and its own. You could suddenly find your money taxed on a whim or worse.
Another problem is Brazil's protectionist policy. To cover up inefficiencies in productivity or the quality of local products, the government imposes import taxes or other protectionist measures. They have yet to learn this is not in their best interest in the long run.
One example: investors should beware of the operational decisions in the government controlled oil company Petrobras (PBR). It often promotes Brazil's national interest at the expense of shareholder value. Not that Brazil is the only country that does this, but it is the biggest one in Latin America after Argentina in the number of protectionist measures it implements. As a NASDAQ article concluded, "the Brazil government's policies seem to be a weak patchwork of support for favored industries."
Brazil lags other emerging markets in the time it takes to move goods within the country. The problem is so prevalent that business owners call it the "Brazil Cost," a euphemism for the large amount of bureaucracy and logistics problems within the country.
The explosive growth has come at the expense of the environment; such as the Deforestation in the Amazon.
Poverty, Education and Crime
Brazil ranks 49.3 in the Gini coefficient index, with the richest 10% of Brazilians receiving 42.7% of the nation's income, while the poorest 10% receive less than 1.2%. However, the income growth of the poorest 20% population segment to be almost on par with China, while the richest 10% is stagnating.
In the assessment of the education systems of 50 countries, Brazil ranked at the lowest end of the list, together with Mexico and Indonesia. Most likely that ranking ignores the divide between the good schools in the big cities vs. the lack of schools in the favelas and rural areas.
The problems with a rule of law, the crime and corruption should make investors wary. Historically, countries with such demographics eventually become embroiled in political upheavals.
How Can One Invest In Brazil ?
Brazil will receive about $64 billion in foreign direct investment next year. However, one should consider the currency exchange rates when investing across the border. As Fig. 2 shows, the variations in exchange rate and the timing of entering and exiting the market can make a big difference in your returns.
Here's a list of 30 Brazilian ADRs traded on U.S. stock exchanges. Including the iShares MSCI Brazil Index Fund (EWZ), there are several ETF options that offer investors the opportunity to gain exposure in Brazil: More ETFs.
How To Trade Brazil ADRs
Companies like oil giant Petrobras, miner Vale (VALE), steel major Gerdau (GGB) and commercial lenders like Bradesco (BBD) and Itau Unibanco (ITUB) make up nearly two-thirds of the BM&F Bovespa and MSCI Brazil.
Here's two examples of the I KNOW FIRST algorithm forecasting for GGB and VALE (Figs. 3 and 4). The basics of this stock forecasting system are described here, here and here. Each point on these charts was taken from the actual daily forecast published the morning before the next market open. Each forecast contains six different time horizon forecasts, from three days ahead to one year ahead. The charts show the actual price in blue and the signal line in red. The positive or negative (Up or Down) signals of the forecast were added to the actual last known price at the time of forecast. Thus, when the signal line is above the actual line, it means "buy," if below, it means "sell". The green and red arrows show what would be the best times to enter the market. One should watch the signals daily, but trade only on strong and consistent signals.
In summary, Brazil has its share of opportunities and risks. With large yet unexhausted natural resources, relatively cheap labor, combined with its knowledge industry, Brazil has a potential to become a new first world country. It just needs to move in the direction of the free market economy, following the example of two like economies -- Australia and New Zealand. The social inequality problems should be solved along the way through education and the creation of opportunities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.