Mike Larson, Money and Markets columnist and editor of the Safe Money Report, is out today. Mark Najarian, the managing editor of Money and Markets, is filling in …
Next week marks the start of the World Cup in Brazil.
That’s when the entire country — and much of the world — will come to a halt, with bars, pubs and restaurants filled with TV viewers, wearing their home country colors and shouting in a cacophony of languages. Business and office life dies.
Peripheral to what concerns investors? Not at all.
For over a decade, Brazil has been a leading light in the investment community; and the World Cup will draw the intense gaze of millions of investors to Brazil’s unique opportunities — and challenges.
Yes, Brazil is one of the BRIC countries (Brazil, Russia, India and China). And yes, it’s more generally grouped as an “emerging market.” But it’s always important to remember this: Regardless of these kinds of labels, each country offers a different investment opportunity, and that’s especially true for Brazil.
Don’t underestimate how important this is. Should the games run smoothly, with scenes of happy soccer fans flocking to stadiums and satisfied foreign tourists frolicking on Ipanema Beach, it could give the country a real boost as an investment destination. However, should things go terribly wrong, it could dampen any enthusiasm for outsiders to pour in more money.
|The key attraction for foreign investors is the country’s rapidly growing middle class — estimated at 100 million people.
The key attraction for foreign investors is the country’s rapidly growing middle class — a group of people who will need consumer goods, health-care services, insurance and more. One study put Brazil’s middle class at about 100 million people, half its population. According to a report by the U.N., the World Bank and Haver Analytics, Brazil’s annual private consumption was $1.3 trillion in 2012, ranking fourth behind the U.S., Japan and China.
Along with other emerging markets, Brazil hit some hiccups late last year and early this year, with many markets selling off on fears of the U.S. Fed’s tapering of its massive bond-buying program. But right now, the search for yield is driving investors to take another look, especially when those yields just aren’t available in U.S., European and Japanese markets.
How attractive is Brazil as an investment opportunity?
The quick answer is: In the short and near term, it’s certain to face further rough stretches. Many experts are also seeing a potential recession.Wait for the turmoil related to the tournament — protests over spending on sporting venues, likely bad press about crime and poverty — and uncertainty over the national elections in October — to take its toll on Brazil-related investments. And then look to grab up some bargains for the longer-term rebound. In the immediate future, understated inflation, over-valued currency, lack of fiscal discipline and political uncertainty are being cited as likely barriers to growth.
In a May 28 report by Bank of America/Merrill Lynch, Brazil equities placed exactly last in a survey of 58 countries’ markets for performance for the most recent week and 53rd over the past year.
Here’s what some other key Brazil-watchers are saying:
Henry H. McVey, head of Global Macro and Asset Allocation, in his Global Macro Outlook last month, noted Standard & Poor’s downgrade of Brazil to BBB- (one notch above junk) from BBB, citing lack of fiscal discipline and weak policy credibility as a reason to stay clear for now. “In our view, Brazil’s current economic trajectory is likely to run substantially below what many investors now think,” he said.
“We continue to approach macro investments in this country with caution,” he added. “In particular, we think that Brazil needs the combination of a weaker currency to improve exports at the same time it needs higher rates to quell greater-than-reported inflation and lack of slack in the labor force. If we are right, then the central bank’s current tightening cycle may go on for longer than many investors think, which likely means slower growth not only in 2014 but also 2015.”
Last week, Brazil reported that its first-quarter GDP grew 1.9 percent compared with the prior year, slightly below expectations and slowing from 2.2 percent in the fourth quarter of 2013. “Weaker industrial production as energy costs rose, falling business and consumer confidence, and high inflation all served to erode activity,” Schroders Emerging Markets Economist Craig Botham said. “The need for a change in policy is increasingly evident. Bottlenecks play a large role in driving Brazil’s inflation, now running close to the top of its target band, and it will be difficult to tackle without addressing supply-side concerns. This data will only spur investor desire to see President Dilma Rousseff ousted in October’s elections.”
Amundi Asset Management, in its May report, said the trend for Brazil “remains bearish,” citing high inflation, and added that “the risk is that the World Cup will cause even more tension on consumer prices.”
|Latin America’s biggest country has all the makings of a comeback story.
In the long run, though, Brazil will certainly be back on the investment agenda, so you can use any downturn to seek out bargains. Latin America’s biggest country has all the makings of a comeback story. It boasts that growing middle class; strong trade ties with China, which is struggling now but sure to rediscover its place as a global giant; proximity to the U.S. market; long cultural ties to Europe; a sophisticated stock exchange; self-sufficiency in oil; and a large supply of alternative energy sources (ethanol) and other commodities. After the election, the new government, whoever is in charge, will be forced to set reforms into motion.
“If you think about Brazil in the next four, five or seven years, which is our horizon, the country is still an attractive market,” Walter Piacsek, head of Apax Partners LLP in Brazil and Latin America, told the Wall Street Journal in May. Apax, the U.K-based private-equity firm, said at the time that it planned to invest hundreds of millions of dollars in Brazilian companies in the next 12-18 months.
|“In the long run, Brazil will certainly be back on the investment agenda, so you can use any downturn to seek out bargains.”
So how to invest in Brazil?
The key Brazil ETFs — iShares MSCI Brazil Capped (EWZ) — is a way to play the broad equity market on the whole, boasting that it covers 85 percent of total market capitalization. Petrobras (PBR), Vale (VALE), Banco Bradesco (BBD), Itau Bank (ITUB), Brasil Food (BRFS), and leading mobile company TIM Participacoes S.A. (TSU) are closely watched names as individual plays and stand to gain from an eventual turnaround.
Brazil is a favorite to win the World Cup, being a traditional soccer power and the home team. But what goes on off the pitch could take a lot of the shine off of any championship and put a dent in its image to the investment world. And the country will have little time to rest, as Rio will be hosting the 2016 Summer Olympics. It will be hoping the recovery has at least started by then.
What has been your experience with Brazil, either as an investor in bonds or equities or through foreign direct investment and what do you think about the prospects? Should a country with such a poverty problem spend so much on a soccer tournament? Or is it a good opportunity to show off what’s good about the country? And who’s your pick to win the tournament, and how far will the U.S. go? Jump down to the comment section and let us know.
|OTHER DEVELOPMENTS OF THE DAY
Speaking of important June dates, today marks the 70th anniversary of D-Day. Since that day in 1944 when U.S., British and Canadian forces helped liberate the Continent, Europe has come a long way, with the European Union, a common currency and a common central bank.
But all is not perfect on the Continent, as Martin Weiss recently wrote about. And not to mention the recent heightening of business tensions between the U.S. and its oldest ally, France, over a potential $10 billion fine against BNP Paribas and France’s efforts to block GE’s bid to buy Alstom.
The U.S. economy added 217,000 jobs in May, the fourth month in a row that the figure has exceeded 200,000, showing solid-if-not-spectacular growth. Stocks got a lift, with the Dow Jones Industrial Average gaining nearly 90 points and edging ever closer to the 17,000 level. Still, many observers lamented the slow rise in real wages, indicating that more needs to be done to spur a sustainable recovery.
Reminder: If you have any thoughts to share on these market events, all you have to do is hop down to the comment section.
Mike Larson’s afternoon Money and Markets commentary will resume on Monday.