Investing in Brazil

In this week’s blog I will investigate whether Brazil is a good investment opportunity that would serve to diversify my investment portfolio with an emerging economy / country, and add growth potential to my overall portfolio. This week I will focus on a summary of the Brazilian economy and review investment vehicles. In a following blog I will focus on investing vehicles and opportunities.

One of the four BRIC (Brazil, Russia, India and China) countries, Brazil will have the seventh largest economy by Gross Domestic Product (GDP) by the end of 2010. Their GDP will be over $2 trillion US in 2010. Projecting 3 to 5 years out, they may become the fifth biggest economy by GDP, overtaking France and the United Kingdom.

The following are reasons why Brazil will be one of the leading economies of the 21st century:

Some segments of Brazil’s economic growth have been stunning:

· Since the 1970s Brazil has transformed itself from a food importer to one of the biggest food exporters in the world. In a ten year period from 1996 to 2006 they increased the total value of their crops from $23 billion to $108 billion. Brazil has more farmland (only 25% is in use) and renewable fresh water than any other country in the world. They are the biggest exporter in the world of the following agricultural commodities: Orange juice, sugar, chicken, beef and coffee and second for maize and soybeans. Given the ever growing world population and the increasing economic power of China and India, the two largest countries by population, Brazil will have a continuously expanding marketplace for their food products.

· In 2007 Brazil Petrobras (the government controls 40% of the stock with 50% of the voting stock) discovered potentially the fourth biggest oil field in the world estimated to hold over 40 billion barrels of oil. In the last 3 years they have discovered sources thought to potentially contain over 50 billion barrels of oil. Petrobras has announced the world’s largest capital-expenditure program – worth $175 billion US – over the next 3 years. To help with the cost-expenditure program they had the biggest stock offering ever in September 2010 raising $70 billion US. In the future Brazil will become the fifth largest oil producing country in the world.

· Brazil was selected to host the 2014 soccer World Cup and 2016 Summer Olympics. These events will require Brazil to make large infrastructure improvements including new roads, mass transit, housing, etc. that will contribute to improving the overall economy in the future.

Other interesting economic facts about Brazil:

· Brazil is the second largest (the US is first) bio-ethanol producer (using sugar or starch based material) and largest exporter to other markets.

· Fourth largest road network in the world (by miles)

· Second largest iron producer in the world

· Ninth largest steel producer in the world

· Sixth largest motor vehicle producer in the world

· Brazil Embrarer is the third largest maker of passenger jets and the biggest producer of mid-range passenger jets in the world.

· In 2008 and 2009 it was the world’s fastest growing marketplace for cars.

In some ways Brazil is still an emerging economy. It has unwieldy labor and tax laws (which have led to a very large informal economy). It can take years to fire an employee. In a recent World Bank survey on conducting business, Brazil ranked 150th out of 183 countries on how easy it was to pay taxes. Business contract disputes can be almost impossible to resolve as there can be virtually endless appeals of any court decision. Brazil may have the fourth largest road network in the world but only 12% of it is paved. This makes it difficult, time consuming and costly to move goods within the county and export. Brazil had the ninth highest murder rate in world in 2009 (although it has been decreasing over the last 5 years).

When you invest in Brazil you are looking for a return on investment and at the same time hedging against your own country’s currency (unless you are from Brazil). For example, if a Brazilian bond fund yields 5% in 2011 and the Brazilian Real gains 10% against the US dollar in 2011, your total return will be 15%. With the US Treasury Department entering into a 2nd period of quantitative easing (QE2) starting the week of November 1, 2010, it will drive the Brazil Real higher versus the US dollar over the next year (and other currencies). At the same time it will increase the price of Brazil’s exports (and other countries’) which would in turn reduce their ability to export products.

Some possible investing vehicles for Brazil:

· BRIC ETFs

· Regional ETFs (i.e. Latin America)

· Brazil ETFs

· Individual stocks (i.e. the 5 largest companies in Brazil)

· Brazil government bond funds

· Brazil bond funds

· Brazil Certificates of Deposits (CDs)

Disclosure: I have the following investments in Brazil:

· DWS Latin America Equity Fund (SLAFX) - 67% of the portfolio composition is invested in Brazil

· Guggenheim ETF (EEB) - 55% of the portfolio composition is invested in Brazil

· SPDR S&P BRIC 40 (BIK) - 25% of the portfolio composition is invested in Brazil

Please chime in with comments about the economic future of Brazil. Should I increase my investments in Brazil? What are the best investments to make in Brazil? What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be writing:

· Income generating bucket of money

· Investing in possible buyout companies

· What Investments to make in Brazil

· Reviewing the classic financial book (written in the 1950’s): Common Stock and Uncommon Profit by Philip A. Fisher

· Using Philip A. Fisher’s stock picking methods to analyze stocks

© 2010 Paul Cusick