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7 Attractive Brazilian Buys
12/02/2011 10:30 am EST
Either of these events—the FIFA World Cup in 2014 or the Olympics in 2016—is a big deal on its own. Hosting both is both a huge coup and a tremendous opportunity from a business point of view.
Both events will require a dramatic upgrade to the infrastructure within the country, which should spur a considerable amount of economic activity.
Beyond these major sporting events, Brazil has enjoyed rare political stability for number of years. That, combined with sustained growth for the last decade, has transformed the country into a blossoming economic powerhouse.
Brazil has a number of things going for it including scale, abundant natural resources, and a politically favorable world position. It has no significant enemies and a large world customer base—particularly China, which is anxious to acquire lots of iron ore and oil, of which Brazil has plenty.
As a result, economists are predicting that Brazil’s GDP growth should average about 4% over the next three years. That’s slower than the growth rate in recent years, but a lot better than what both the Europeans and the North Americans are looking at. In fact, it’s probably double what we might expect.
No story is complete without some caveats, and it’s true that Brazil has battled inflationary pressures for years, with the rate now running around 7%. This is causing their central bank to keep interest rates high, which could be a drag on growth going forward.
Corporate taxes are likely the highest in any of the emerging markets, running over 35%, and there is still a strong socialist streak that runs through the country’s leadership. But these caveats aside, it is likely that over the next couple of years investors will see significant returns by having some exposure to Brazil.
Political interference aside, both the huge and profitable iron-ore company Vale (VALE) and the country’s crown jewel Petrobras (PBR) are great companies, and I think you could take a position in either or both now.
Another popular ADR is AmBev (ABV), which is the No. 1 brewer of beer and distributor of soft drinks in the country. I also own shares of Banco Santander Brazil (BSBR), which is currently trading 44% below its 52-week high, but has a yield of 8.5% and a P/E ratio of less than 8.
There are two other banks you could consider: Itau Unibanco (ITUB) and Banco Bradesco (BBD). Both are larger in Brazil than BSBR, but all three tend to trade in unison, so I tend to buy the least expensive issue with the highest yield.
Of course, most investors buy Brazil through various ETFs or mutual funds that focus on the area.
The largest by far in terms of assets is the iShares MSCI Brazil Index Fund (EWZ). This ETF holds many of the issues mentioned above, but spreads out the risk that may be involved with any particular equity.
Since this gives you the whole country in one neat package, it’s the best choice for someone who wants to add some Brazilian exposure to a portfolio without being forced to decide between individual stocks. It’s my top pick for this month.
To sum up, there are many ways to get involved with what appears to be a bright future in Brazil, and since their markets have lagged this year, you are buying some of these assets at discounted prices. That’s not going to last forever.
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