With the United States facing many challenges at the moment, investors are faced with a tough decision. Either continue to invest domestically or seek opportunities in other regions of the world. One area that has recently caught investor interest are the emerging markets of the world. One market that appears poised for a bright future is Brazil. I will list 6 reasons why Brazil should be considered in a portfolio.
Over the past few years, Brazil has had its ups and downs. Lately though, it seems to have been more negative. However, there are many reasons that investors should still be optimistic about the future prospects for the region.
(1) Future Events
The biggest reason may be the benefits that a couple of future events will provide. The country will be sponsoring both the 2014 World Cup and the 2016 Summer Olympics. Both of these events should generate strong revenue for Brazil. Additionally, as Brazil prepares for the games, investors should expect the country's infrastructure to grow exponentially. Based on recent estimates, Brazil can expect to generate $3.5 billion from the World Cup and $5 billion from the Olympics.
Additionally, the events should open up future opportunities to derive additional revenue from future tourism. The improved infrastructure from the World Cup and Olympics should help to create a flourishing tourism industry over the next decade and beyond. Investors may want to consider companies and industries that will benefit from this improved infrastructure.
(2) Consumer Confidence
The second reason to be positive about Brazil is because of consumer confidence. During the last 10 years, more than 40 million Brazilians have been able to escape poverty and climb into the middle class. This demographic shift should increase demand for many goods and services and help drive Brazil from an emerging market into a developed one. If investors want some historical perspective, all they have to do is look at what happened to the United States economy as more and more people climbed into the middle class. It sparked one of the biggest bull markets in history.
(3) Manufacturing Growth
A third reason to consider Brazil is because of their manufacturing industry growth. During the third and fourth quarter of 2012, Brazil's manufacturing growth has been 1.1%, the highest rate since early 2010.
(4) Population Age
A fourth and final reason to consider Brazil is because their median population age is just 28.9 years, making it one of the youngest median population ages in the world. As a point of comparison, the United States has a median age of 36.9 and Japan has a median age of 44.6. This helps to explain why so many people are confident about Brazil's future. The benefits from having a younger age are immense. Mainly, it allows the younger members of society to work to grow the economy without worrying about challenges that face an older society, such as how to provide healthcare and affordable living.
(5) Commodity Rich
Brazil is the beneficiary of lands rich in natural resources. The country has an abundance of precious metals, oil, minerals, and agricultural products. It is one of the world's largest producers and exporters of iron ore, nickel, aluminum, and coffee.
(6) Valuation
Brazil's valuation, as compared to other emerging markets, is incredibly undervalued. Brazil's current valuation puts it close to levels the region hasn't seen since the 2008 global economic crisis. Things have improved since that period which means investors should be paying attention.
How To Invest
Now that the reasons for considering Brazil have been addressed, let's look at ways that investors can take advantage of the region. One way that investors can put their capital into the region is through exchange traded funds. ETFs allow investors to diversify their funds while gaining exposure to a broader set of companies, industries, sectors, and investment principles.
The most common ETF in Brazil is the iShares MSCI Brazil Capped Index Fund (EWZ). EWZ trades over 1 million shares per day which offers investors plenty of liquidity to establish positions and then liquidate if necessary. EWZ invests in a wide selection of industries including healthcare, energy, and financials. The fund's top holdings include Petroleo Brasileiro (PBR) and Vale S.A (VALE). Both of these companies are heavily invested in the energy market. So if you are confident about the future of energy, natural resources, and precious metals, these stocks and the ETF may be vehicles to consider.
Vale closed Friday at $19.51, giving it a market capitalization of $100.5 billion and a PE ratio of 8.57, much lower than its peers. It also has a price to book ratio of 1.2 and an average ROE of 16%.
Petrobras closed Friday at $15.96, giving it a market capitalization of $104.1 billion and a PE ratio of 10.01. It has a price to book ratio of 0.7 and an average ROE of 7%.
Conclusion
Above are 6 reasons why investors may want to consider diversifying into Brazil's economy. Consumer confidence is high, tourism is set to flourish over the next decade, and the manufacturing industry appears to be growing at strong levels. While that does seem favorable, it is important to keep in mind some risks. Historically, the country has a rather low unemployment rate of 5.4%. This forces businesses to pay higher than normal wages to retain the best workers. Also, the country faces high tariff costs and has few international trade agreements in place. This is a negative at the moment as it focuses the country to be domestically focused. If this were to change, it would turn into a positive as the country would become a global economic power.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
