After a fall of nearly 10%, is this an opportunity to buy Brazil?
Even after a fall of nearly 10% in recent weeks, the Brazilian market is a still a star performer, having gained over 20% in the past year.
What's driving Brazil?
In a word: commodities. As a gross generalisation, within the BRIC economies, Brazil and Russia provide the materials, China and India use them up. Consider the following:
- Brazil is the worlds biggest exporter of coffee, soybeans, chicken, beef, sugar, and orange juice;
- Almost twice the size of the EU, less than 7% of its land is arable, but unproductive land is being irrigated and converted into farmland -- yes, they are making more of it. Much of this development is uncontroversial, but there are environmental and ethical considerations in some regions;
- Water is a commodity too, and is key to agricultural development. Brazil has more of available water than any other country, almost 80% more than nearest rival Russia. Less than 1% of Brazil's water is currently used;
- According to some reports, Brazil is already a net exporter of oil, and there are considerable finds still to be developed. Proved oil reserves are 13.9bn barrels (17th in the world), and exploration is continuing. The state-controlled oil giant Petrobras is planning to build two new refineries, one of which will cost $11bn;
- Brazil is also home to Vale, the world's largest producer of iron ore.
How is the economy performing?
Growth is expected at 4.7% this year, even as the government struggles to keep inflation within its target range of 4.5% +/- 2%. To achieve this, interest rates were increased to 12.25% earlier this month.
This interest rate is not as painful as it would be in UK, as levels of personal debt are pretty low, and people generally prefer to save to buy a house rather than borrow.
The currency, the Real, has been appreciating against other currencies as exports are booming.
What about Brazilian politics?
When President Lula Da Silva was first elected in late 2002, there were concerns that his Workers' Party would be hostile to private industry, and the stock market reacted accordingly. In practice, he has been generally pro-business, has not overspent, and has been tough on inflation.
The country's debts have been reduced, and are now rated as investment grade by ratings agencies. There are currently plans to establish a sovereign wealth fund.
As regards commodity-rich emerging markets, many investors regard the Brazilian regime as much less capricious than Russia's.
How expensive is the Brazilian market?
After the recent fall, the Bovespa Index is trading on a multiple of about 16, so considerably more than the FTSE's 11.4, but not outrageous if you accept the argument that Brazil is a long-term winner.
How can I get exposure to Brazil?
One of the easiest ways is through Exchange Traded Funds (ETFs); a popular one is iShares MSCI Brazil
(LSE: IBZL)
, in which investor Jim Slater has a significant stake. You can find a listing of Brazil-related vehicles at Trustnet.
I'm bullish on Brazil, but for balance you should bear in mind a local saying quoted by another Brazil fan, Jim Rogers:
"Brazil is the next great country in the world, always has been, always will be."
You could buy a Brazil ETF via Motley Fool Sharebuilder and pay commission of just £1.50.
