Being in Miami, I tend to be more exposed to what is happening in Brazil. While most of the financial press has extensively covered the crisis and contraction in Europe, concerns on China's growth slowing and even the quickly slowing Indian economy - I see very few articles on Brazil in the national press. Which is unfortunate as the news out of South America's main economic engine is not good. I am avoiding long investments there and have recently increased a short position in a leading online retailer there as I think the country is heading for an economic contraction.
10 Concerns about the "country of the future":
- Yesterday Brazil's central bank sharply cut its 2012 GDP forecast for the country to 1.6% from 2.5% previously.
- The country is a large exporter of commodities (iron, soybeans) to China. It is very dependent on these flows to China and the Middle Kingdom is slowing.
- Chevron (CVX) and Transocean (RIG) are facing $20B in civil lawsuits around a 3,600 barrel (no, this is not a misprint) spill far offshore. This is having a chilling effect on direct investment in the oil industry and crimping Petrobras' (PBR) exploration plans.
- It is not only Chevron and Transocean that are facing the wrath of the country's officials. Brazilian authorities have detained the head of Google's (GOOG) operations in the country after the company failed to heed a court order to take down YouTube videos criticizing a local-election candidate.
- I have several friends in fund management and commercial real estate that travel to Brazil frequently. One of things they consistently discussed about Brazil is the fact that half the population is illiterate, yet it is more expensive to go out to dinner/clubs in Sao Paulo than Miami by roughly double. Feels like an indication of a bubble to me.
- Although the country has made great strides in reducing poverty in the last decade, it still has a long way to go. 8.5% of the population lives on about $1.50 per day, and over 20% lives below the poverty line.
- Other than Embraer (ERJ), it is hard to find one non-commodity based firm that is world class within the country.
- Their manufacturers are protected by steep tariffs, so they are inefficient as they have historically faced no real competition. Quick, name one Brazilian car maker? Tech company?
- The country is starting to address some of its infrastructure needs, but the overall infrastructure in Brazil is substantially below those of developed countries (104th out of 118 countries in one study) and correcting this may take much longer than the government is estimating.
- Major banks like Banco Bradesco (BBD) and Itau Unibanco (ITUB) are selling at roughly 2 times book value...kind of like our banks in 2006 when they were fueled by a similar construction boom....now they sell for less than book value.
Given these challenges I am avoiding new investments in the country even as some of the country bigger companies like Petrobras and Vale (VALE) look cheap on a valuation basis. I also increased my short position in Mercadolibre (MELI) for reasons I have articulated before.
Additional disclosure: I am also long CVX