3 Ways to Profit From Brazil

07/09/2015 10:00 am EST

Focus: GLOBAL

Tony Daltorio

Editor, Investors Alley Premium Digest

Latin America's largest economy—Brazil—is struggling. Weak commodities prices, a water crisis, political intervention in the economy, and the scandal surrounding the state-controlled oil and gas behemoth are primarily to blame, explains Tony Daltorio, editor of Daily Profit.

This combination of events has pushed this once booming economy into recession. Brazil's gross domestic product is expected to contract by 1% to 2% in 2015, the worst recession in 25 years.

And in US dollar terms, the economy will contract by nearly 25%, thanks to a plunging currency. The Brazilian real is down about 50% since President Dilma Rousseff came to power in 2011.

Adding to Brazil's woes are high interest rates. In a world of zero and negative interest rates, Brazil's key Selic interest rate is currently sitting at an astonishing 13.75%.

And for the first time since records began in 1992, Brazil's economy actually lost jobs in April. Business investment has collapsed and business confidence is at levels not seen since 1998.

But that doesn't mean investors should forget about Brazil. Emerging markets guru Mark Mobius notes that Brazil has the seventh largest economy by GDP and sixth by population. Demographics are favorable, too, with the median age at 30.7 years.

Since 2003, some 36 million people have come out of poverty and joined the middle class. Literacy is also high, at above 90%. Finally, Brazil is extremely rich in natural resources.

For those combing Brazil for bargains today, here are three ideas that crossed my mind.

The first is a company involved in agriculture, Adecoagro S.A. (AGRO), which owns farmland in Brazil, Uruguay, and Argentina.

It produces over 1.3 million metric tons of agricultural products, including corn, wheat, soybeans, rice, sugar, and milk.

And unlike most Brazilian stocks, this year it is up about 17%. Interestingly, billionaire investor George Soros owns nearly 26 million shares of Adecoagro.

The second choice is a consumer play: Ambev S.A. (ABEV). This company is, of course, the Brazilian subsidiary of Anheuser-Busch InBev (BUD).

This means aggressive cost-cutters 3G Capital and Jorge Paulo Lemann are involved, which is always a positive.

Ambev is the biggest brewer in Latin America. It is also a soft drink giant and the largest PepsiCo (PEP) bottler outside the United States.

Finally, for very patient investors, there is an exchange-traded fund: iShares MSCI Brazil Capped ETF (EWZ).

This ETF has a yield in excess of 4.25%, thanks to financial stocks making up more than a third of the portfolio. These financial stocks are sure to benefit down the road when interest rates finally begin to decline in Brazil.

Brazil is not the place right now for investors looking for widespread capital gains. But patient, contrarian investors should start building positions in select opportunities now.

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