Are Investors Getting More Bullish on Brazil in 2012?

by Justin Dove, Investment U Research
Thursday, September 29, 2011

Here we go again with another global sell-off.

Just when things are starting to feel comfortable again, everything has to go haywire. The markets can’t keep doing this, can they?

History tells us that eventually things will bottom out. Hopefully it will be by the year’s end, but as investors continue to throw the baby out with the bath water, there will certainly be some buy-low opportunities ahead. And with western economies struggling in Europe and the United States, investors are poised to invest more in emerging economies that are showing better growth.

The IPEA reported last Wednesday that Brazil stands to be a major destination for foreign investment in 2012. The International Perception of Brazil Monitor study found that the likelihood of Brazil receiving foreign investment rose from 35 points in May to 43 points in August.

Further, the percent of interviewees worldwide who consider Brazil one of the top five destinations for foreign investment rose to 70 percent in August – a 14-percent increase from May.

Other Reasons Working in Brazil’s Favor

There are some good reasons that worldwide investors may be turning bullish on Brazil in 2012.

Offshore Drilling – Petrobras (NYSE: PBR) claims that there are 13 billion barrels of oil and gas trapped in the sub-salt field deep in the South Atlantic. A couple weeks ago, Petrobras opened the Lula-Mexilhao pipeline which will eventually pump 10 million cubic meters of natural gas per day.

The World Cup in 2014 and Summer Olympics 2016 – The country will undoubtedly need to modernize its infrastructure and facilities leading up to hosting some of the world’s premier sporting events. The buildup in anticipation for these events should be good for industry and construction over the next couple years. Then the higher rungs of the economy should see an influx of business activity between ’14 and ’16 when the world flocks to Brazil, bringing people, and their money, from far and wide.

Cheap Currency – Earlier this year there were concerns that Brazil’s real was getting too expensive, which hurt its ability to compete with other exporters in the world market. But global volatility weakened the real in comparison to the U.S. dollar, which will keep costs for manufacturers low and keep exports competitive.

Tariffs Encouraging Manufacturing Jobs – Foxconn, part of Hon Hai Precision Industries Co., Ltd (OTC: HNHPF.PK), manufactures iPhones and iPads for Apple (Nasdaq: AAPL), among many other electronics. The China-based company recently expanded with a new plant in Jundiaí, Brazil. It’s Foxconn’s fifth Brazilian plant and there are reports that they are looking at building more in the country. Because of the high tariffs in the country, imported electronics, such as the iPad, cost more than double what they would in the United States. So if Apple, or other companies, wants to compete in that market, they’ll need to manufacture within Brazil to avoid these problems.

Brazil Stocks and ETFs Trading Low

The sentiment that Brazil is on the rise seems contrary to what the markets are saying. The iShares MSCI Brazil Index (NYSE: EWZ) is down almost 30 percent since May 10. EGShares Brazil Infrastructure (NYSE: BRXX), an ETF that plays on Brazil’s infrastructure building companies, is down about 23 percent since May 10.

Petrobras, on the verge of getting some big projects online, is at its lowest point since 2009. Vale (NYSE: VALE), one of the largest mining companies, is also trading at its lowest since 2009. Vale, which mines metals and fertilizer materials such as phosphate and potash, could benefit from the recent run-up in metals and other commodities prices.

The crisis in Europe could have a profound effect on Brazil’s growing economy. BBVA predicts in its third-quarter outlook on the Brazilian economy that GDP growth would temporarily slow to 1.8 percent if the situation in Europe became catastrophic. According to BBVA, the Brazilian economy would “be directly affected by a reduction of global demand, the increase of global risk, by the decline of commodity prices… and in particular by a reduction in both consumer and producer confidence.”

This risk is why Brazilian stocks and ETFs are struggling along with stocks and ETFs across the board. But the relatively low values could be a nice entry point for a contrarian investor who believes Brazil has a solid decade ahead.

Good investing,

Justin Dove

Article by Investment U