As fears of weak economic growth continue to prevail in the U.S., Brazil has been a hot ticket amongst emerging markets and is likely to continue to witness a booming economy.
The South American nation is rich in natural resources and is a leader in global agriculture. The recent global boom in commodities has fared well for the largest national economy in Latin America as its exports of beef, soybeans, coffee, orange juice, iron ore and steel have all increased. Furthermore, this elevated demand for natural resources is expected to be sustainable as global populations continue to expand and the purchasing power in developing nations increases.
Brazils’ attractiveness is further enhanced relatively strong financial sector. The nation has a healthy balance sheet with public sector debt at roughly 40% of GDP and average capital adequacy ratio of its banks at about 18%. Additionally, interest rates in Brazil are relatively low in real terms making borrowing attractive and could result in further economic expansion.
A third factor that remains favorable for Brazil is its self-sufficiency in the energy markets. Brazil has nearly shaken its dependence on foreign oil by developing its own oil reserves through domestic petroleum production and embracing renewable energy with a vengeance through the use of ethanol and hydroelectricity. In fact, all gasoline in Brazil contains ethanol and over half of all cars in the country are of the flex-fuel variety meaning they can run on 100 percent ethanol. Furthermore, the nation’s largest oil producer, Petrobras (PBR), suggests that ethanol accounts for more than half of current light vehicle fuel demand and expects this number to increase over 80 percent by 2020.
Lastly, robust expansion of Brazil’s middle class is expected to be a major contributor to the nation’s economic expansion in the coming years. In fact, Credit Suisse estimates that over the past five years nearly 22 million people have been added to Brazil’s middle class and this is expected to continue to grow as the nation continues to prosper. This increased wealth translates to higher disposable incomes which lead to an increased number of people acquiring the accoutrements of middle-class life, which further leads to increased domestic consumption and further GDP growth.
In conclusion, a combination of these forces will likely enable Brazil’s economy to grow at a rate that will outpace the nation’s inflationary pressures and continue to bolster an already prosperous economy. Here are some ways investors can play the Brazilian markets:
- iShares Brazil MSCI Brazil (EWZ), which is heavily concentrated in materials and financials and focuses on large-cap Brazilian stocks like Petrobras and Vale (VALE).
- Market Vectors Brazil Small-Cap ETF (BRF), which focuses on small-cap Brazilian stocks which are likely to reap the benefits of increased domestic consumer consumption. Some of its holdings include homebuilder Gafisa (GFA) and Lojas Renner, which is a Brazilian company engaged in the manufacturing and sale of women’s, men’s and children’s apparel.
- SPDR S&P Emerging Latin America ETF (GML), which allocates nearly 63% of its assets to Brazil.
- iShares S&P Latin America 40 Index (ILF) which allocates nearly 58% of its assets to Brazil.
Disclosure: No Positions