Brazil: Caution Needed Before Plunging In

Brazil investment opportunities are being prominently broadcast in the world's top financial media, notably the Financial Times. Last Tuesday we read about how that country's Cia. Vale do Rio Doce kept the market guessing on the prospect of agreeing to a takeover deal with Swiss-registered mining group Xstrata. This company had just hit an $11 billion earnings record.

The Xstrata story is a further confirmation of the point I made about the commodities fund managed by Eve Hambro: the enormous demand for metals on the part of China and India was putting pressure on mining companies to further expand their activities. This could not be done in the short time available. Economic necessity was providing an underpinning for mergers and acquisitions. In the mining field, the law discovered by Karl Marx about the concentration of capital was coming into play. Once again, dismal Marxists were helping wealth creating capitalists to take profits on mining shares. There is humour even on our financial TV screens.

Brazil exports metals to China, and it is all out for a prodigious development of its metal export potential. The Xstrata battle is very much like the BHP Billiton and Rio Tinto wrestling match. It is a battle of giant egos as well as a great share-trading opportunity.

The economic fundamentals of Brazil are not all that bad, though by no means excellent. They are not in the AAA category. Its international political image is only good because of Lula. He is proving to be one of the world's best-loved politicians. In the most advanced countries, the economic process is not completely understood let alone in Brazil, where its economic ratios display an element of 'rawness', which is much more than that of a country like UK.

Brazil is now the largest emerging market. It has edged past China, according to the Morgan Stanley Capital International's emerging market index. Brazil has 14.95 per cent of the index, and China 14.15 per cent. This is also confirmed by Fact Set and Citi Research. The present difficulties of financial organisations reached one of its peaks on Friday morning with the suspension of the shares of the top private equity organisation Carlyle in Amsterdam. An enormous investment opportunity for commodities has been created. The plight of financials is the opportunity of commodities. On Friday morning, there was a lot of shorting in commodities which will soon translate itself into a rebound once a new investment commodities opportunity have been created.

A warning must be made to those who are too charmed by the economic ratios coming from Brazil. The Economist of February 23 revealed the strange theft of oil and gas secrets on the famous recent Petrobras find. That story is indication of much of what happens in that country.

Money can be made in Brazil, but not by those who venture into that market after spending a few minutes in a stockbroker's office. Natural resource markets are delivering a supply shock of 1970s dimensions, further amplified by the bank subprime shock. Carlyle's private equity debacle last Friday morning is a new shock yet to be absorbed. This great financial organisation can face bankruptcy. The present Paris central bankers conference should be monitored. Commodities will most probably prove to be a saving grace for investors in the present downturn.

Disclosure: Long