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  • Why Invest in Brazilian Stocks and 6 ETFs to Get Started Right Now 0 comments
    Jan 24, 2011 5:22 PM | about stocks: EWZ, BRAZ, BRF, BRXX, UBR, BZQ

    There is an old saying in Brazil that goes: "Brazil is the Country of the Future and it Always Will Be".

    Well, it seems the "future" has finally arrived for Brazil. Brazilian GDP is expected to grow about 7,5% in 2010 and 5% in 2011. In recent years, the growth has also been significant as shown in the graph below. This graph shows the GDP in Billion US$ over the last decade:

    GDP in Billion US$ x Last Decate

    Notice that while the economy did shrink in 2009 affected by the international crisis, this drop was only 0,2% and the recover in 2010 has been quite strong.

    Why should you believe the economy will keep growing in the future? I will divide the answer in two parts: Long-Term and Mid-Term drivers.

     

    Long-Term drivers


    • Stable Political and Economic Environment

    Brazil's political system is a democracy with three well defined powers: Executive, Legislative and Judiciary.

    The economy has reliable statistics and follow "western standards" for accounting and the press is free.

    This provides investors a clear picture of what is happening in the country and in the economy. That is specially important when you compare Brazil to other emerging markets, for example, the other three BRIC: China, India and Russia.

    The economist cover about Brazil

     

    • Diversified Economy

    Brazilian economy is very diversified producing from agricultural commodities to cars and aircrafts.

    While commodities still represent a considerable part of the economy, industry and services has grown very quickly in recent years.

    Diversified Economy

     

     

    • Abundant Natural Resources

    With an area of 3,287,612 square miles, Brazil is the 5th largest country in the would.

    Allied with the geographic location, this give a huge potential for agriculture. Brazil also has big reserves iron ore, oil and one of the largest biodiversity in the world.

    Mine from Vale in Brazil
      Mine from Vale in Brazil

     

     

    • Growing middle-class

    Over the last two decades, the growing economy and a series of wealth distribution policies have helped improving the quality of life for a lot of Brazilians.

    Today, more than 80% of the population is considered middle-class and that creates a powerfull consumption environment, which is always good for businesses.

    Market at 25 de Março in São Pauo
      Market in downtown São Paulo, 25 de Março street

     

     

    Mid-Term drivers


    The economy growth described so far should be reason enough to invest in Brazil. But wait, there is more!

    Over the next few years, three events will cause Brazil to become highlight in the news and a shine in your portfolio

    • World Cup - 2014

    Stadium being built in Brazil

    While everybody already knows Brazil is going to win the next world cup playing at home (yeah, right! I wish it was that easy.), not everybody realizes the impact this is having and will still have in Brazil's economy. The infrastructure investment in public transportation and tourism will cause a big impact in the 12 cities that will host the matches.

    This event is particularly important for industries such as construction, airlines and lodging.

    • Olympics - Rio 2016

    Rio 2016 - Summer Olimpics

    Similarly to the word-cup, the summer Olympics 2016 in Rio will cause a lot of infra-structure and tourism investment. That even will be more concentrated in Rio but it will be very important to keep the momentum on investment in Brazil.

    • Pre-salt (Pré-sal)

    In 2008, the Brazilian state-controlled oil explorer and producer, Petrobras, anounced the first discovery of oil in the pre-salt layer. The pre-salt is exactly what the name implies: it sits below the salt layer offshore and shown in the following diagram:

    Pre-salt in Brazil offshore

    The new discoveries have more than doubled the Brazilian reserves so far and specialists say there is much more to be found.

    While there was a lot of debate on the impact of the pre-salt for Petrobras due to political interferences and to the world's largest share offer ever at US$ 67 Billion, the impact for the country will definitely be positive in the long run:
     

    • First of all, the government owns a big chunk of Petrobras and that will mean more money coming for corruption (Ooops, I mean public investment) in the future.
    • Brazil is already self-sufficient in oil and when the added production starts to flow, a good part of that will be exported bringing dollars into the country.
    • The government has already created rules that define Petrobras as the only operator of the pre-salt. It has also created rules that require Petrobras to contract most of the services needed for exploring and producing from the pre-salt from Brazilian companies. That will cause a huge demand for construction, naval and engineering industries.


    6 ETFs to Get Started Right Now

    If you want to get exposure to Brazil in a diversified manner, ETFs are the easiest way. If you have an account through which you can trade ETFs from the New York Stock Exchange (NYSE), you can invest in Brazil right away.

    I will list six ETFs for you to get started:
     

    iShares MSCI Brazil ETF (NYSEARCA:EWZ)

    This 10-year old ETF, introduced in July 14, 2000 has gathered more assets than any other non-US, single-country ETF. It currently has over $11 billion under management. iShares Brazil tries to replicate the MSCI Brazil index and as such it is highly exposed to the Brazilian Large Caps: Petrobras, Vale, Itau Unibanco and Bradesco.

    Over the past 5 years, EWZ has risen almost 200%, while the S&P 500 is pretty much breaking even.

    While these blue-chips do provide good scale and less volatility than it's smaller counterparts, this ETF is highly exposed to commodities producers: Petrobras, Vale, OGX Petroleo, CSN and Gerdau. That obviously bring volatility. On the other hand, iShares Brazil gives long term investors a good inflation hedge as it will benefit from commodities prices spike. In a world where the growth is coming from emerging markets, commodities prices tend to go up as basic needs such as food and energy are the first ones purchased by the emerging middle-class.

    When you buy this fund, you are basically long the world's low-middle-class.The one that buys its food, can afford its house, basic appliances and perhaps a car. They will not spend on fancy, expensive gadgets or on the dream holiday.

    Well, if you are long that low-middle-class you should know they are growing fast. Countries like China, India and Brazil are growing between 5% and 10% and the ones getting the most advantage of this growth are the "new middle-class".

     

    Global X Brazil Mid Cap ETF (NYSEARCA:BRAZ)

    This fund is more recent and started trading June 2010. The investment seeks to provide investment results that correspond generally to the price and yield performance of the Selective Brazil Mid Cap index.

    While the large caps in Brazil are highly tight to the world's economy, these mid-cap companies are more targeted to the internal market and should take more advantage from Brazil's solid macro fundamentals.

     

    Market Vectors Brazil Small-Cap ETF (NYSEARCA:BRF)

    If you want to get even further exposed to Brazilian internal market, this fund is for you. The investment seeks to replicate as closely as possible the price and yield performance of the Market Vectors Brazil Small-Cap Index

    This fund is older and has more assets than the mid-cap focused BRAZ. With $1.2 billion under management BRF's liquidity is still not so high though. On top of that, some of its investments don't have that much liquidity either.

    If you want to get exposure to the domestic economy though, nothing is better than BRF.

     

    EGS INDXX Brazil Infrastructure ETF (NYSEARCA:BRXX)

    The fund seeks investment results that generally correspond (before fees and expenses) to the price and yield performance of the INDXX Brazil Infrastructure index.

    With the World-cup and Olympics fast approaching, infrastructure investment will be priority in the next decade. But here again, BRXX's low liquidity is a concern as well.

     

    ProShares Ultra MSCI Brazil (NYSEARCA:UBR)

    If you want to go all-in on Brazil, UBR is the ETF for you. The investment seeks daily investment results that correspond to twice (200%) the daily performance of the MSCI Brazil Index.

    To achieve that, UBR uses leverage, which obviously increases its risk so be careful before investing in this one. It does provide a nice Beta for your buck, though.

     

    ProShares UltraShort MSCI Brazil (NYSEARCA:BZQ)

    During some periods of time, you may feel you have too much exposure to Brazil or you just want to bet on a short-term drop. BZQ seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Brazil Index.

    Again, use leveraged ETFs with care. Besides, if you read thus far, you probably agree with me that this ETF is not a good long-term investment. It just may help in the short-term though.

     

    In summary, while there are risks to any investment, Brazilian growth perspective should minimize these risks for long-term investors. The factors described here like growing middle-class, abundant natural resources and the stable political end economic environment provide a perfect destination for your emerging market investments.


    Read More:

    How to invest in Brazil?
    28 ADRs from Brazilian companies for you to choose from



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I do however have options which leave me long on Brazil's stock broad index
    Themes: Brazil, Emerging Markets, ETF Stocks: EWZ, BRAZ, BRF, BRXX, UBR, BZQ
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