Gyrating Salsa: Brazilian Economy Dancing with Joy

Brazil has emerged as one of the most attractive investment decisions in the recent times. This is obvious given the efficiency with which numerous reforms have been implemented since 1995.

With one of the largest reservoirs of natural resources and a booming urban population, Brazil is poised to justify its position as an attractive investment destination.

One of the most attractive features of Brazil is its reliance on the sciences, research and development. Infrastructure development is at full pace [161,500 kilometers of paved road] and abundant power generation [63 million+ Megawatts of installed capacity]. All this and much more make Brazil stand out as a much better destination to do business.

Falling unemployment levels and rising household incomes have also boosted consumer confidence by several notches, yet its inflation rate (following global cues) has been rising for quite some time now.

Consumer Confidence Index

• The index of consumer confidence [ICC], complied by the local Getulio Vargas Foundation [FGV], reached a series high of 120.3 in December 2007, up 7.7% in annual terms. The ICC is based on a survey of consumer expectations about their personal financial situation and the economy in general.
• This follows a 3.4% dip in 2006. It might be worth noting that the dip in ICC in 2006 was recorded for straight three quarters, which makes it a significant one. So an Elliott Wave analysis may well put the present ‘rise’ to signal a period of immense growth at least till 2012.

  Furthermore, rising from the dip and surging 7.7% for the FY-07 is indeed a positive vote of sentiment from the Brazilian middle class.

click to enlarge

• Consumer confidence is firm and thus bodes well for private consumption trends.
• Average forecasted GDP growth is 3.9% for the extended period of 2007-2011 [as against 1.9% for US for the same period].
• The number of credit cards in circulation has registered a year over year growth of 12.6% rising from 87 million to 98 million. This bodes well for the interest rate industry, namely finance, automobiles, e-commerce and most importantly, retail.
• On the back of a high amount of mergers and acquisition activity going on in Brazil, the social mood seems to be increasingly favorable for investments.
• On a more socio-economic front, the mass social mood has braced itself with a newfound confidence as can be noticed from a rise of ‘bold’ fashion colors and wardrobes. Hemlines have decreased as against an increase in US, translating in an increase of pessimism for the coming years.

Interpretation

For US investors, Brazil is a rich basket of challenges and potentials. It is obvious that on the back of strong domestic demand and rising disposable income levels, sectors like retail and e-commerce will be the cash cows.

Furthermore, given the liquidity in the domestic system, due to the increasing amounts of credit card circulation, financial institutions should offer the highest ROI.

The realty market is expected to boom even more, following the renewed vigor in government spending on infrastructure development. Yet, with the spiraling rise in oil prices, inflation is proving to be quite a challenge. But given the establishment’s fervor in boosting the economy, this may turn out to be just a temporary glitch in the system.

With increasing amount of private equity in infrastructure development, Brazil offers a whole new range of opportunities for those who are comfortable in investing in Latin America.

The Bottom Line

In the coming years, Brazil's huge burgeoning middle class and positive outlook makes it an ideal place for investors to park their hard earned money.

Disclosure: Author holds no position in Brazilian equities, but given his strong opinion, he calls it his own craziness.

Sources:

1. MasterCard Worldwide index of Consumer Confidence Index
2. Comments on the Brazilian Economy [Itau BBA]
3. Brazilian consumers optimistic for 2008 [Euromonitor Archive]
4. Popular Culture and the Stock Market, 1985, Robert Prechter

Comments

[cachaca]

dude...check your facts.
Electricity is NOT abundant. They were having blackouts just a couple of years ago. You can't fix that overnight.

I am from brazil, and frankly, I fear investing in Brazilian companies. I have made money for short stretches on Vale do Rio Doce (RIO) and Petrobras (PBR). But you have to always be mindful of corruption in Brazil.

It is a developing nation, growing fast, but without the rigid walls that China erects with the communist regime. An analogous nation to Brazil is India.

Yes, there are grat investment opportunities, but as always, DYODD.

[Soham Das]

Hi Cachaca...

Expecting that "couple of years ago" roughly goes four years back i.e 2004, here are some of my reasons to believe things written above.
Quoting from International Energy Outlook 2007,

"Throughout Central and South America, significant shares of national electric power supplies are derived from renewable energy sources—primarily, hydropower. In times of drought, such heavy reliance on hydroelectricity has been problematic, resulting in widespread power shortages. Hydroelectric generation accounted for 83 percent of Brazil’s total electricity supply in 2004, and despite ongoing efforts to diversify the fuel mix for the country’s electricity generation, hydropower is projected to remain Brazil’s predominant source of electricity through 2030... "

In Central America it is expected to generate more than 54% of the total energy demand.

Yes, Brazil does have a problem there, but is it any worse than India's problem where it is relying on majority [circa 80%, data not checked] on the oil and natural gas imports from OPEC countries? In my opinion no! With the present oil prices spiraling, Brazil is partly insulated from this problem and thus safeguarding the national coffers.

When, a booming economy is dependent on a rising potential [renewables] rather than a falling one [read: oil] I see a chance over there for new companies to fill in this void of assuring a continuous supply. And we must not forget, Brazil is one of the most underrated economies, with an amount of emphasis given on R&D.
I see it as bricks and mortars for building a sustainable 'winning' trade.
You may very well note that, I have quoted forward data till 2030. I have a reason there.
Thats for the long term perspective. Real long! :)
Hope it clears your doubts.

[lblaine]

Brazil has made great strides in energy independence. They use a good portion of sugar cane based ethanol to fuel their motor vehicles. They rely heavily on hydroelectric power, which is very economical and reliable, although occasional droughts lead to rationing. Also, they have continued developing oil and will be among the leading producers of crude oil in 2020.

Nevertheless, the easy money has been made in Brazil over the last 5 years. The next five years could be very good, but not like the last five years. EWZ was $10 five years ago.

[globalmacro]

Any thoughts on Sadia SA? I've purchased a fine bit of it and I think it's a nice play on the rise of the middle class in Brazil. What doth thou sayeth fine author?

[granger]

I have held Sadia for over too year new. I have have harvested profits twice, then the split came. I am still holding my last 1/3 and made the decision about 9 months ago, that this would be held as a long term core international holding.

Sadia has a long history. Solid company in my opinion. (please do you own DD).

One note, it is quite volatile, so just have to ignore the gyrations, as to not get shaken out. But thestock will give you opportunities to buy or add a position on market over reactions.

[Soham Das]

GlobalMacro,

I am a technical analyst, and I am not following FMCG much, but yet this is my two pence:

Depending on the entry point and investment horizon which you take, my opinion will vary slightly.

If you invested in SDA anywhere between 2005-2006, then 2007 was the apt time to exit as Brazil was reeling under inflation and FMCG stocks are observed to do good at those times. In fact anytime in 2007 was a good time to exit. Now going forward, it is a strong HOLD signal from my side. You may be able to book some profits in around 12months.

And if you have planned to enter now... it is a strong BUY signal from my side. The business looks pretty good to me.

I guess if you follow granger's investment philosophy of buy and forget then this 'should' be returning quite a hefty profit.

Sadia is expected to do good in around OCT-NOV-DEC and regional wise in UK and Russia.


[Disclaimer: I do not hold SADIA SA at the time of writing and the views above should not be construed as investment advise. Please do your own deductions and refer a qualified stock broker before making any investment decisions]

[globalmacro]

Thank you for your thoughts. I'm intending on holding it for 5-10 years. I'm not worried about short-term fluctuations. In fact, I prefer buying quality stocks that are more volatile because there are alot more opportunities to add to the positions over time. Suntech Power (STP) is another good example of an extremely volatile stock that plays off some of the same fundamental factors going forward.

[Soham Das]

Excellent strategy global... I always believe if one sells when everybody is selling then who is there to buy?

Volatility keeps weaklings out of the equation... if you feel bullish its best not to have weak hands in the deal :)

[globalmacro]

One day does not make a good investment but I sure like relative outperformance. That's how I get judged.

[globalmacro]

This article turned out to be very timely with S&P increasing the debt rating to investment grade just this week. Nice call.