How To Profit From The Expanding Brazilian Middle Class

Includes: BRF, EWZ, PBR, VALE
by: Emerging Money

By Sean Geary

The rise of Brazil's middle class over roughly the past decade is nothing short of remarkable. Prior to Fernando Henrique Cardoso's administration in the late 90s, Brazil's economic history was fraught with tales of woe. From inept currency management to massive income disparities, Brazil was a black hole for foreign investment.

However, as the result of successful policy from three consecutive administrations, Brazil's middle class is thriving. According to the Brazilian government, the middle class now constitutes 54% of the population: a remarkable feat considering that just a generation ago, the majority of the populace were objectively 'poor.'

During former president Lula's administration alone, Brazil was responsible for lifting "28 million people out of extreme poverty and allowing 36 million to enter the middle class, in a country of 190.7 million."

This begs the question: how can American investors profit from the rise of this newly minted middle class?

The most common investment vehicle associated with Brazil is the iShares MSCI Brazil Index ETF (NYSEARCA:EWZ). While the EWZ does a fantastic job tracking the Sao Paulo market, it is a poor instrument to play the Brazilian middle-class consumer.

EWZ is heavily weighted towards global commodity giants Petrobras (NYSE:PBR) and VALE (NYSE:VALE). As a result, the EWZ is often a better proxy for global commodity demand than it is for Brazil's vibrant middle class.

A better ETF for playing Brazilian middle class growth is the Market Vectors Brazil Small Cap ETF (NYSEARCA:BRF). Although smaller and less liquid than the EWZ, as its name indicates, the BRF invests in small cap companies which are more sensitive to Brazilian middle class consumption than VALE or PBR. The fund's three largest weightings are consumer cyclical at 18%, consumer defensive with 15.7%, and real estate with 14.3%.

Long-term investors looking to start a position in the BRF should watch how the ETF reacts at its 200-week moving average around 39. The BRF has consistently traded above the 200-week since 2008. Should the ETF find support at this level, investors should consider starting a long position.


Author disclosure: Immediate family is long EWZ, PBR, VALE, and BRF.