Brazil has been one of the big winners of the rally in global equity markets over the last year, as the BRIC economic bloc established its position as the leader in the economic recovery. Strong demand for raw materials in other developing economies fueled an impressive rebound, and the selection of Rio de Janeiro as the host of the 2016 Olympics gave an autumn boost to South America’s largest economy.
Brazil has grand ambitions of hosting those Olympic Games as a top-five world economy, and has made considerable progress towards that goal. The resource rich nation is now one of China’s largest trading partners, and has benefited tremendously from a global rebound in commodity prices. A strong commitment to social programs has closed the significant wealth gap. The Brazilian currency has surged over the last year as foreign investors have flocked to get a piece of the action. But some formidable obstacles remain as constant reminders that Brazil is still very much an emerging economy facing a difficult road to developed market status.
The Infrastructure Bottleneck
Over the past decade, Brazil’s commitment to maintaining and improving infrastructure has failed to keep pace with its rapidly-expanding economy and growing cities, a fact readily acknowledged within the country. Speaking on the potential for Brazil’s economy, former central bank president Arminio Fraga recently expressed general optimism but noted some major areas of concern. “We still have serious barriers to growth,” said Fraga in a February interview with BusinessWeek. “I have a particular concern with infrastructure, which is in terrible shape. We’ve not been keeping up with new needs, not even with maintenance.”
This neglect came to a head in November 2009 when a massive blackout affected some 60 million people and 18 of Brazil’s 26 states. The loss of power resulted in stranded metro trains and hundreds of traffic accidents, sparking public outrage over the country’s outdated and overloaded electrical grid. “It’s sad to see such a beautiful city with such a precarious infrastructure,” said one witness to be blackout. “This shouldn’t happen in a city that is going to host the Olympic games.”
Playing Catch Up
With the Olympic games (and more immediately the 2014 World Cup) looming as opportunities for Brazil to showcase itself as a modern country on the global stage, the government is making a furious effort to enhance its roadways, utilities, and transport systems. Brazilian president Luiz Inacio Lula da Silva recently launched a massive $878 billion program to upgrade Brazil’s infrastructure, a welcome development to citizens and foreign investors alike.
Some see the infrastructure plan as a pivotal issue in upcoming presidential elections. The ultra-popular Lula will step aside to comply with term limits, but the massive infrastructure spending could give a boost to the campaign of his hand-picked successor, chief of staff Dilma Rousseff. “Rousseff is expected to tout the massive investments to voters as evidence that Lula’s center-left government is rapidly improving the potholed roads, clogged ports and underfunded health system that dog Latin America’s biggest economy despite strong growth in recent years,” writes Fernando Exman.
According to government documents, more than $250 billion will go to Brazil’s energy sector, with another $50 billion going towards transportation systems and $150 billion to fund the “My House, My Life” program aimed at providing housing to low income families.
Infrastructure ETF in Focus
Brazil’s failure to make sufficient investments in its infrastructure and the government’s accelerated catch up plan may create some interesting investment opportunities. The spending plan could be good news for the Brazil Infrastructure Index Fund (BRXX), which surged more than 3% in Monday trading following news of Lula’s infrastructure program. BRXX tracks the INDXX Brazil Infrastructure Index, a benchmark comprised of 30 leading companies deemed to be representative of Brazil’s infrastructure sector.
BRXX focuses exclusively on infrastructure stocks, but spreads exposure across a number of sub-sectors, including telecom, electric utilities, transportation infrastructure, and independent power producers. The underlying index is tilted towards large cap stocks (the median market cap is more than $5 billion) and recently had a projected price-to-earnings ratio of about 18 times.
Disclosure: No positions at time of writing.