Brazil's Ready for Big Fixed Income Investors

Brazil’s time has come.

For decades investment professionals have joked that Brazil was “the next big thing… always has been and always will be.” The country is phenomenally rich in commodities and natural resources—it’s the world’s largest exporter of sugar, coffee, beef, poultry, soybeans, and other items.

However, until recently Brazil had yet to come anywhere near realizing its potential. From the 1980s until the early ‘90s the country trailed other emerging market economies due to its high inflation, international debts, and political corruption.

Brazil tamed the inflation problem with its re-introduction of the Brazilian real in 1994— inflation subsequently plunged from 2,300% to a more reasonable 4% today. The country began denominating its debt in the real soon after, thus avoiding the exchange fluctuations that typically cripple emerging market economies, e.g. if you owe $4 billion in a foreign currency and that currency rises 5% compared to your own currency, your debt just rose 5% as well.

The results speak for themselves. Since 2004, the Brazilian economy has grown at an average of 4.5%, its fastest pace in 20 years. What started out as a predominantly commodities focused economy is giving way to a domestic consumption story. Spending at Brazilian malls increased 16% in 2007 to $33 billion.

However, there is still a long way to go before Brazil has anything resembling a large middle class. In 2003, 64 million people had an income that was less than half of the minimum wage ($193 a month). This number has since fallen more than 7%... but today nearly one third of Brazilians still live in poverty.

However, while the economy is heating up, Brazil’s stock market— the Bovespa— is red hot. The Bovespa has tripled since 2004 alone. And new developments have paved the way for a wave of new capital to flow in.

Earlier this month, for the first time in history, Brazil’s debt was upgraded to investment grade by Standard & Poor’s. Then, yesterday, Fitch confirmed the rating, upgrading Brazil to investment grade as well.

These are truly historic developments. And they open the door for a wave of new capital to enter Brazil as institutional investors restricted to investment grade markets will now be able to invest there.

Many large fixed income investors like pension funds and institutions are only allowed to invest in markets that have received two investment grade ratings or more. Collectively these funds manage some $2.6 trillion. And with Brazilian government bonds yielding between 12% and 14% compared to US Treasuries at 2%-4%, it's safe to assume that some of these funds will soon find their way to South America’s largest economy.

Comments

[Bear Stocks...:]

Our readers invested in EWZ back in May 2007 and within one year that position has returned 80.29%. If fact, Brazil was the only BRIC emerging market to suffer a mere 15% peak-to-trough retracement during March 2008, when India and China declined by more than 30%.

2008 May 31 10:06 AM

[Imoilman:]

excellant ... in addittion BRAZIL has some great individual issues
including.. Petrobas [PBR], and RIO

2008 May 31 12:51 PM

[Jose Urioste:]

What about Brazil's noe negative balance of payments?

2008 May 31 01:15 PM

[surgcare:]

Does anyone know how to buy Brazilian Bonds .If so would you post this info or could you e-mail me at [e-mail] Thanks

2008 May 31 02:34 PM

[zaphod42:]

surgcare: See Everbank for 3 mo. C.D. FDIC inc.

2008 May 31 05:30 PM

[whidbey:]

This should be played in closed in bond fund reflecting emerging markets, I think. Look at BOE or TEI as the type of funds which will give good effect to Brazil without lose of diversification.

2008 Jun 01 05:46 PM

[Contrarian ...:]

Brazil: The Saudi Arabia of ethanol within the next decade?

Source: www.contrarianprofits....

2008 Jun 02 03:17 PM

[Genesisgkh:]

TEI makes sense for this type of exposure, but BOE doesn't. I own and like BOE, but it's an international covered-call ETF. It owns almost no bonds.

2008 Jun 08 01:18 PM

[Jaime Bece:]

Unfortunately inflation is running high and biofuels will not help push down food prices (already +15% YoY), especially those with highest demand from China (e.g. soy).

The interesting point is what will happen with all the number of Government-employed people in Brazil. Will they start to work and look for entrepeneurial ideas? That I'd like to know

Good article by the way

2008 Jun 13 05:56 AM

[mangiamillie:]

Bill Gross of Pimco recommended Brazil 5 year bonds, closed end corporate bond funds, and bank preferred stocks.

Jul 12 08:38 AM