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Brazil Is the Best of BRIC

by: Carl T. Delfeld October 13, 2008 | about stocks: EWZ / PBR / WMT    
Carl T. Delfeld

Carl T. Delfeld

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Foreign investors have pulled out a net US$9.3bn from Brazil’s stock market (proxy EWZ)so far this year to cover losses elsewhere. Its market has suffered like most in the world but much less so than other BRIC partners such as Russia, China and India.

This confirms my oft-stated belief that BRIC begins with Brazil. Political stability (Mr. Lula is up there in the stratosphere at a 78% approval rating), strong consumer spending, more flexible exchange rates, a more effective central bank and higher reserves may help Brazil weather the global financial storm much better than most expect.

Brazil has been able to maintain foreign reserves in excess of $200bn. More than that, the credit crisis may have come at a good time, potentially helping the economy to cool without damping growth too far below the country's potential. Inflation has risen recently to about 6% due to strong consumer spending. A slowing of global growth could be helpful in moderating this and also allow the central bank to suspend its tightening policy sometime later this year.

"The effects [of the global financial crisis] will be much more benign here than in the developed world," says the chief economist of a large foreign bank in São Paulo quoted by the Financial Times. "We expect growth to slow from 5.4% this year to 3.5% next year. Compared to global growth of at best 1% in 2009, that's excellent."

In addition, Brazil’s newly discovered reserves are both huge and hard to reach, are expected to propel Brazil up the table of oil producing nations. BP CEO Tony Hayward says the new finds are “as significant as the North Sea” – which in the 1970s was one of the new frontiers that helped pull the world out of its last big oil shock.

But many in the center-leftwing government seem determined to avoid sharing the coming bonanza. The future shape of the industry may be decided by short-term political maneuvering leading up to presidential elections in 2010.

Petrobras (PBR), the top holding in the iShares MSCI Brazil ETF (EWZ) and a world leader in deep-sea exploration, is a natural leader for the difficult task of tapping what are some of the most inaccessible oilfields on earth. But the government may have other ideas. IT is likely to create a new national oil company, backed by President Lula da Silva, under 100% government control, to take ownership of the new reserves and develop them in partnership with Petrobras and others. While Petrobras is controlled by the Brazilian state through a majority of its voting stock, most of its capital is in non-voting shares. Some 60% of total capital is held by minority and largely foreign shareholders who would miss the opportunity to benefit from exploiting the offshore discoveries.

Already the world’s biggest producer of almost any farm product you like to mention, including ethanol made from sugar cane, Brazil is the fourth biggest manufacturer of cars and will soon become an important oil exporter. Its home markets are booming and have become a huge magnet for foreign direct investment. Its capital markets are attracting massive inflows from overseas. Meanwhile, Brazilian society is being transformed as incomes rise and inequality falls. Recently, Wal-Mart (WMT) announced it would invest $1.1bn in 80 to 90 new stores in Brazil next year, where it currently operates 330 stores.

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This article has 9 comments:

  •  
    Oct 14 12:06 AM
    Dear Mr. Delfeld,
    Your article is a very balanced and accurate report about current state of Brazilian economy. My congratulations!
    Almir R. Américo
    (Sao Paulo, SP)
    Reply
  •  
    Oct 14 12:42 PM
    ILF is another ETF that can be used for investing in Brazil as PBR and RIO are a significant part of their holdings. I was in a little early on ILF and took a beating. But I'm thinking it's time to get back in.
    Reply
  •  
    Oct 14 03:14 PM
    I purchased ewz $98 I see my stock dropped to half. What do I do?
    Reply
  •  
    Oct 14 03:55 PM
    wait until it's worth $186 and then sell
    Reply
  •  
    Oct 14 05:08 PM
    User 279439, what to do depends upon what your goals are. If you do not like Brazil as an investment then sell EWZ into the first rally. If you want to hold EWZ you can buy a bear market EFT such as EEV, which moves inverse to the emerging markets. You must time your exit from EEV well to profit, before the markets start a new uptrend. Current expectations are for a worldwide recession which may last many months, it is likely that EWZ will fall below the current prices eventually. If you have a long term investment plan then you can add to EWZ as the price falls. I believe that Brazil is a great long term investment opportunity. How long before the market turns upward is anyone’s guess.
    Reply
  •  
    Oct 14 06:10 PM
    Brazil is export driven.. Where's the growth? Internal? Doubt it. Why not buy Brazil when the market turns up rather than while it is still tanking. In fact, 'artogish' seems to offer a valiid approach buying any of the BRICs.. If you want to buy Brazil, India or China, (I left off Russia as they seem to have issues outside their control right now...) why not look at companies that work within their borders and are successful and are not subject to outside issues, because the author is right, Brazil seems to have an inner vitality.

    I just bought some HOGS (Chinese meat packer) as I know that they are growing within China and do not export. I'm sure there are companies like this in So. America, such as AMX, PDA and FMX (These are off the top of my head and may not be Brazilian per se..) that cater within So. America, but are not involved in exterior markets. I have owned EWZ in the past, but am concerned with the major two companies, Petrobras and Vale... Both are subject to exterior demand. Vale is in a battle to raise its prices to China and China is playing hardball. As far a s Petrobras is concerned... Goldman Sachs and many others have called for oil to drop to $60 a barrel. Where's the return? If I recall, some other members of EWZ are banks. These banks are making money based on Brazil's commodity market...

    I'd also like to point out that George Bush has a 78% rating.. Oh wait! That's a 78% negative rating .. Oh well.... Shame we don't have Lula in office here ... Heck! I'd take Sarkozy, Gordon Brown... Or even Medvedev right now....

    jegan ;-)
    Reply
  •  
    Oct 14 06:41 PM
    Sound advice, "artogish," and a very interesting and oftentimes tongue 'n cheek commentary from "John Egan". Both posts are compelling reads.
    Reply
  •  
    Oct 14 10:21 PM
    Carl:

    Thank you for your insight!

    Could you elaborate on your comments regarding "nationalization&... of the deep water findings. If what you said were to happened what do you think the impact would be to PBR (and to lesser extent EWZ) shareholders?

    "It is likely to create a new national oil company, backed by President Lula da Silva, under 100% government control, to take ownership of the new reserves and develop them in partnership with Petrobras and others. While Petrobras is controlled by the Brazilian state through a majority of its voting stock, most of its capital is in non-voting shares. Some 60% of total capital is held by minority and largely foreign shareholders who would miss the opportunity to benefit from exploiting the offshore discoveries."

    Thanks
    Reply
  •  
    Oct 15 07:49 AM
    I also didn't understand the ramifications, as the previous commentator mentions.

    >>Could you elaborate on your comments regarding "nationalization&... of the deep water findings. If what you said were to happened what do you think the impact would be to PBR (and to lesser extent EWZ) shareholders?
    <<
    Reply
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