Fast Growth Rate

In a 2003 study, global investment banking firm Goldman Sachs forecast that Brazil, Russia, India, and China would leapfrog over traditional market leaders — including the U.S. — to become the four most dominant global economies by the year 2050.

Many financial analysts scoffed at the idea of lumping Brazil into the newly coined acronym BRIC. Sure, Russia, India, and China had forged ahead, but Brazil seemed a bit of a laggard, hardly a full-fledged participant in globalization.

Today those skeptics are rethinking their opinions as Brazil’s economy undergoes what may well be an historic transformation. The word “mudanca” means change in Portuguese, and change is what Luiz Inácio Lula da Silva (Lula) promised when he became Brazil’s president in 2002. From all indications, Lulu has delivered.

Fast growth rate

Growing at its fastest rate in 20 years, Brazil is the world’s tenth largest economy, entering the global marketplace and attracting investments from around the world. What’s fueling this explosive growth and attracting the attention of foreign investors? The answer can be found in a combination of factors:

• A stable currency with inflation held in check.
• A staggering amount of commodity exports and trade agreements.
• Newly available consumer credit that’s created a new middle class of confident spenders, and
• A robust Bovespa — Brazil’s stock market.

All of this prompted Standard and Poor's Ratings Service to boost Brazil's sovereign long-term credit rating up one notch to an investment grade triple-B-minus. Fitch Ratings soon followed suit. No one could have predicted that Brazil, a country that once suffered an inflation rate of over 2,000 percent and defaulted on hundreds of billions of dollars in debt, would one day be elevated to the ranks of investment grade.

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Behind the Turnaround

Behind the turnaround

A variety of factors combine to fuel Brazil’s rapid turnaround and promise sustained future growth. Let’s take a closer look at them.

Commodities, energy, and ore: Whether it’s extracting riches from the depths of the ocean floor or harvesting crops and minerals from the land, Brazil profits from abundant homegrown resources in key commodity sectors — both the so-called "soft commodities" (the agricultural sector), and "hard commodities" (iron ore and energy-related resources such as oil.)

The country already exports more beef, poultry, tobacco, soybeans, sugar, coffee and orange juice than any other country in the world. Nowthanks to the low-cost of processing vast fields of sugar cane into ethanol, Brazil is also widening its lead as the top-ranked global exporter of this alternative fuel. Potential ethanol exports are estimated to be as high as 10 billion liters — or 2.65 million gallons. —.

While the market for ethanol expands, the demand for oil continues unabated — a demand reaping big rewards for Brazil. With the recent discovery of a sizable deep-water oil field in the Santos basin, Brazil is set to become the next global petro-power. The potential size of the field ranges from 15 to 33 billion barrels of oil equivalent (BOE). BOEis a unit of measure based on the energy released by burning one barrel of crude oil.

Tupi, a second major field discovered in 2007, has estimated recoverable reserves of five to eight billion BOE. Since Brazil already has proven oil reserves of 12.2 billion BOE, these two additional finds could boost Brazil’s ranking from the world’s sixteenth largest oil producer to number seven, right behind Russia.

World production of iron ore averages one billion metric tons of raw ore annually, and the world's largest producer is Brazilian mining corporation Companhia Vale do Rio Doce (CVRD). Headquartered in Rio de Janeiro, CRVD controls over 85 percent of Brazil's 300 million tons of annual iron ore production.

Consumer credit and the rising middle class: Readily available consumer credit, rare in Brazil until recently, helps fuel the economy. Statistics show Brazil's economy expanded by 5.8 percent in the first quarter of 2008 — the highest rate for a first quarter since 1996.

Amid a population of 186 million, a new middle class has emerged and spread far and wide. Contrary to traditional stereotypes about rampant povertyin 2007 fewer than 1.5 million people earned less than $3,000 annually. And even the lowest wage earners now have access to three things they never before thought possible —credit, credit, and more credit!

While even creditworthy U.S. citizens have trouble finding affordable mortgages in 2008, banks are making it easy for Brazilians. The number of home mortgages rose 72 percent in 2007, the highest percentage ever, thanks in part to 30-year terms, which put home ownership within reach. . As of May 2008, the typical home mortgage rate was an annual 12 percent.

More income plus more credit equals more shopping. Brazil’s big-city shopping malls now rival those found in New York, London or Paris. Once the exclusive domain of the rich and famous, now middle-class shoppers stroll the corridors with credit cards and tote bags filled with upscale boutique merchandise Real estate developers are rushing to build more shopping malls for these eager consumers.

Foreign Investment/Joint Alliances: In the past, the country’s social unrest, political injustice, and economic instability made investment too risky. Thanks to the factors we’ve just mentioned, the level of foreign capital coming into Brazil is surging.

Total foreign investment in 2007 stood at an all-time high, with about $35 billion pouring in. Brazilian banks are betting more foreign investors will find Brazil's expanding financial services market an attractive option, especially as U.S. banks falter.

In the first quarter of 2008, Bovespa (Brazil’s stock exchange) was up 15 percent over 2007 and an impressive 600 percent since 2002. Adding fuel to the hot economy, the country’s currency, the real, reached a nine-year high against the U.S. dollar.

• There are signs everywhere that foreign companies, institutions and business executives show increased interest in taking advantage of opportunities currently available in Brazil. We’ve already mentioned real estate developers. Here are some other examples: Last year Brazil attracted foreign direct investment (FDI) in factories and business operations totalling $37 billion — twice as much as India. Brazil ranks as the world’s third largest recipient of investment capital via equity issues.
• A San Francisco biofuels startup, Amyris, has teamed with Crystalsev, one of Brazil’s largest ethanol distributors and marketers. The new joint venture will build a pilot plant in the state of Sao Paulo, Brazil.
• David Neeleman, JetBlue Airway's Brazilian-born founder, sees opportunity in his country's harried airport hubs and a need for cheaper and more efficient air travel. He has raised $150 million, including $10 million of his own funds, from American and Brazilian investors and placed a $1.4 billion order with Brazilian aircraft maker Embraer for 36 planes, with options that would bring the single order's potential value to more than $3 billion.
• MTS, the European government bond trading system owned by the London Stock Exchange, has struck a deal with the Brazilian Government to add sovereign debt denominated in Brazil's local currency to its trading list.
• More than 30 Brazilian companies enjoy full American Depository Receipt (ADR) listings on the New York Stock Exchange; 40 to 50 more are traded in the NASDAQ over-the-counter market.
• The Chicago Mercantile Exchange, a major Bovespa shareholder, recently struck an alliance that allows traders in Hong Kong to buy and sell Brazilian securities through its Globex trading system. Brazilian traders can hedge against fluctuating prices for sugar or soybeans while trading in the biggest futures market in the worldAccording to StocksAbroad.com, an index of Brazil’s stocks traded on U.S. exchanges has gained a whopping 83 percent over the past 12 months since May 2008, compared with a 6 percent drop in the Standard & Poor's 500 index during the same period.

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How to Get in on the Action

How to get in on the action

There are a variety of ways that international investors can capitalize on the explosing growth taking place in Brazil. An insatiable appetite for Brazilian commodities around the globe, coupled with increased production of and record prices for those commodities, presents an an attractive opportunity for those who can tolerate the risks involved in any commodity play.

Brazil’s new credit worthy status is already attracting investors from around the globe. If certain transactions are too sophisticated or costly for some investors, there are other ways to participate.

Since many of Brazilian stocks are not listed on U.S.-based exchanges, some investors are getting in on the action by buying into emerging markets mutual funds with emphasis on Brazil. Exchange-traded funds, ETFs, or conventional managed mutual funds are convenient and less complicated ways to invest in foreign markets. These are similar to index mutual funds, but they trade like stocks.

Alternatively, there are also a number of closed-end mutual funds that feature Brazil.

For more details and guidance, helpful resources for international investors are posted on the Bovespa website at www.bovespa.com.