Investing In Brazil
The Soft Commodities Boom
By Michael Orme
What comes to mind when you think of Brazil? Beaches, Favelas, Coffee and Football — probably. Brazil as the next superpower? Probably not. Brazil as one of the best mid-term investment bets? Again, probably not.
Well Ian Bremmer of Eurasia, a top political and soft infrastructure analyst, sees Brazil as a ‘low risk’ opportunity compared to Russia, India and China, where many of the world’s fund managers’ interest is focused.
Brazil, Russia, India and China form what Goldman Sachs christened the BRIC a few years back. They suggest that the BRIC is going to become the world’s most dominant economic grouping by 2030.
Now, before we look at Brazil let’s analyse the rest of BRIC. Basically, Russia is Putin’s fiefdom and enjoys playing power politics with foreign businesses and investors. It has awful demographics, a contracting population and a shocking health record related to alcohol abuse and AIDS. In addition it is in danger of becoming a ‘Saudi with snow’. It shows few signs of developing sufficient economic diversity to dilute its dependence on petro-chemicals.
India has tremendous pent-up problems. In the countryside there’s almost a suicide epidemic among stricken farmers. And Islamic fundamentalists, notably from the Deobandi sect in Pakistan, threaten the stability of the whole subcontinent.
China has ‘terrific social unrest’, which is kept out of the public eye by the world’s most advanced police state. But it shows signs of cracking. Pressures include how to balance economic growth with satisfying its growing middle class.
Also it has to combat the world’s worst pollution, and deal with a deluge of migrants from an increasingly ‘deserted’ countryside into its cities. Moreover, some sharp analyst based in Hong Kong reckons that the Shanghai Stock Exchange is now overvalued by 70%—75%. This bubble will inevitably burst causing more socio-political problems.
Investing in Brazil: Five million jobs created since 2000
Brazil by contrast has many strengths. But before we get too excited we must acknowledge that it is a corrupt, overregulated and violent society with glaring inequalities.
However, the same applies to the other BRIC nations. The point is the extent to which the country is improving.
The signs look good under Lula da Silva, a former hardnosed union negotiator, and an arch pragmatist unlike the ideologue Hugo Chavez to the North. Under Lula, Brazil’s hyper-inflation has been beaten. It runs a trade surplus of $40bn a year and is on schedule to repay its international debt. Lula has also created over 5 million jobs since 2000, and is tackling over-regulation.
Other good signs include Brazil’s GDP growth. It grew by 5.4% in Q2 2007 compared to Q2 2006. Also its bank rate is down to an unheard of 11.25% and consumer spending was up 5% in Q2.
It’s nearly certain that Brazil will achieve ‘investment grade’ status within the next two years. This will open it up to many foreign investment institutions. And make it cheaper for it to borrow in the money market.
Investing in Brazil: Grain prices rise 300%
That alone is a good reason to take a look at Brazil as a place to invest. Another reason is that in the improved economic climate, Brazil is spawning a flourishing middle class. There are over 20 million middle class households in Brazil. There were only 14 million at the turn of the century. Relatively, this means Brazil’s middle class is five times larger than either India’s or China’s.
A significant pointer to rising confidence in Brazil for investors in either stocks or property is that the leading credit rating company, Experian, recently acquired Brazil’s largest domestic agency.
Brazil’s largest private bank, Santander, forecast that by 2010 a million new homes will be sold in Brazil with 60% of them backed by mortgages. In 2005 there were only 600,000 house sales and only 40% were backed by mortgages. Mortgages are on track to account for 10% of GDP by 2010 versus 2% today.
Another plus point for Brazil is it is well placed to take advantage of the soft commodities boom. Grain prices have risen by 300%—400% over the past two years.
Also the agricultural commodity boom has a long way to go. The US government’s reckless support for corn-based ethanol, Chindia’s move to a meat-based diet, the high price of oil and Chindia’s lack of water have all put pressure on grain prices. It needs to be noted that the shift to meat diets in Asia is one of the big factors behind the dearth of grain for the world market as 70% of all grains are used as animal feedstuffs. And Brazil stands to benefit more than any country from all this.
Investing in Brazil: It’s insulated from resource
and climate issues
But perhaps the strongest reason to look at Brazil is that it is insulated against some of the biggest problems facing the rest of the world. This includes shortages of fresh water, agricultural commodities and secure supplies of energy. The country has nearly 20% of the world’s fresh water and accounts for over 20% of the world’s agricultural commodities, notably grains. Indeed, China gets a third of its foodstuffs from the vast farmlands of Brazil.
On the energy front, after decades of focus and development, much of Brazil’s fleet of vehicles runs on ethanol. Also it has enough oil to cater for the rest of its power needs. This means it is relatively insulated against swings in the price of oil.
So is Brazil set to explode? Only if we never forget that we’re operating in a world of relativities not absolutes, often making choices between the bad and the worse.
In terms of its fundamentals and its future scope Brazil looks relatively strong not just against the rest of the BRICs but also against up and coming states like Vietnam, the Philippines and Mongolia.
Let the investment carnival begin? Well steady. It’s all about bubbles these days, but there are bubbles and then there are bubbles! For example the US housing market and the Shanghai Stock Market at one extreme — burst or fit to burst. We’re simply suggesting here that the Brazilian bubble is only just forming.
Michael Orme is a financial journalist, former stockbroker and associate for an institutional investment advisory firm.
Sign up for The Fleet Street Letter today.
First published on October 13th 2007
Get the day’s big financial news in one easy hit! Fleet Street Daily gives you the financial stories that matter. If you’re an investor, you’ll know the importance of staying on top of the news. Every day brings new events, and those events are what move the markets. With Fleet Street Daily you’re one step ahead of the crowd. Because we don’t just tell you what’s happened — we tell you what it means and what you should do about it. Fleet Street Daily is a lively, relevant and entertaining resource designed to help you make smarter investment decisions. Best of all, it’s 100% FREE! So sign up today!
Related articles on commodities and investing:
The Four Golden Rules On Investing - 27/08/2005
The four golden rules on investing to consider: 1. Know how to select probable winners. This requires analysing the financial position of the company; it requires understanding what the company actually does and determining whether the company represents good value...
The Warren Buffett investment formula - 30/04/2005
Each year, as Chairman of the Board (and its largest shareholder), Buffett writes a letter to his fellow shareholders. Buffett’s observations into how businesses should be run are always insightful. This year, Buffett addressed certain topics that are particularly important for us all to consider. Many investors, Buffett points out, achieve disastrous returns simply by forgetting to invest only when good value is offered to them. Instead, they deal too frequently on the basis of fads...
Rising Commodity Prices May Affect The Price Of Bread -
So look out for a hike in bread prices if this knock on effect from the commodity markets reaches UK bakeries. And if you want to get even on rising commodity prices – oil, coffee, wheat and so on – then you should really check out Keith Cotterill’s group of commodity traders.
The Commodity Prices Boom - 01/05/2006
It is time to unfurl our map of distant lands, sling a pick and shovel over our shoulder and head off in search of gold. And if not gold, then copper, or zinc, or nickel... Frankly in today’s commodities boom it seems that just about any mineral or metal will do...
Commodities Futures: A New Way To Play for Private Investors - 28/09/2007
You can now easily play the commodities futures curve. ETF Securities is launching a range of new funds in the next few weeks that will give you access to ten baskets of commodity futures prices that are linked to the Dow Jones-AIG Commodity Three-Month Forward Indices. This makes it much easier for private investors to gain access to these futures markets...
Useful links on investing in brazil:
Rising markets and commodities - Accordingly, our managed-accounts are invested in the fastest-growing regions of the world. At present, my preferred stock markets are Brazil, China, Mexico and Russia. Over the coming year, I expect commodities to resume their bull-market and make headlines all over the world.
Invest in China or Brazil? - By 2003, China was the second largest economy in the world and the largest recipient of foreign direct investment...Throughout the early '90s, Brazil's GDP grew at 1.8% per year less than one-fifth of China's GDP growth. Makes you want to invest in China, right? Wrong...
Investing in Brazil - There is already a growing domestic market, with growing interest from North American and European investors…
Information on investing in Brazil - The Brazil country guide tells you all you need to know about the brazilian economy, people, culture, climate and more.