| Brazil Revisited |
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| Tuesday, 15 December 2009 03:36 | |
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Brazil's economy has been on our radar screen for the past couple of years and appeared to be a viable option for boosting portfolio growth. In fact, we gave it full coverage in an August 2008 article entitledBrazil: Take a Closer Look at Investing. We noted that the country was the world's tenth largest economy and was growing at its fastest rate in 20 years. Brazil enjoyed a stable currency with inflation held in check, and a staggering amount of commodity exports and trade agreements. Consumer credit, which was available to many for the first time, had created a new middle class of confident spenders. And Bovespa, Brazil’s stockmarket, was relatively robust. But since we're all linked into this tightly-meshed financial econo-sphere, when the global meltdown hit, Brazil was not immune. First the Bovespa index hit the skids, down from its 73,000 highs in spring 2008 to below 30,000 by fall of the same year. Then their currency (reals) tumbled to 2.5 reals to $1 in December, down from 1.55 reals to $1 during the prior few months. Now as 2009 draws to a close, we thought we'd drop in for a quick revisit to see how the country measures up with the rest of the world that's struggling to bounce back from the economic crisis. On the positive side, Brazil was the first country in Latin America to stage a recovery and got their economy back on more solid footing by the first half of 2009. The currency returned to pre-meltdown levels and the Bovespa index has now risen to 64,000—possibly overvalued since corporate earnings still lag, but investors are coming back. The Bovespa has surged 85% this year and is positioned for its best gain since 2003, thanks in part to prospective government stimulus plans, rebounding commodity prices, and record low interest rates. Although since Brazil’s retail sales jumped in October at the fastest pace in a year, it's prompted speculation that the central bank will lift interest rates in the first half of 2010. And no less than the World Bank speculates that if Brazil continues on the path it is on now, it will move from being the tenth largest economy in the world today to the fifth largest by 2016. A rosy picture, but there are still downsides to consider. For instance, there is that pesky "current account"— the broadest measure for trade in goods and services. Brazil has a deficit that's expected to hit a record $40 billion at the end of 2010. This is primarily due to the real’s gains against the dollar that has fueled imports and made the nation’s exports more expensive. The growing current account deficit will keep the real from strengthening next year, making Brazil more vulnerable to reliance on overseas borrowing. On the other hand, commodity exports are thriving. Sugar output in Brazil will rise 10% from last year’s harvest to 34 million metric tons. Sugar prices have more than doubled in 2009, partly due to India's less than expected sugar cane yields. To satisfy that country's sweet tooth, India may have to import between 6 million and 8 million tons of Brazil's sugar in 2010. Iron ore, another of Brazil's major commodities, could see a price spike in 2010 largely because of China's growth and insatiable need for raw materials. As further evidence of how inter-connected the global economy has become, even the most recent events in Dubai have impacted Brazil. In late November when Dubai threatened to delay $1.7 trillion in debt repayments, it stirred panic in major stock exchanges. The Bovespa index fell 2.3 percent the day following the announcement. But after Abu Dhabi injected a hefty $10 billion into Dubai to help with debt repayments, Brazilian stocks saw a four-day rally. Brazil's overall recovery may sound promising, but what does this all mean to you and me? Is this the time to speculate on Brazil? Some seem to think so. In October Banco Santander Brasil SA, the Brazilian unit of Spain’s biggest bank, raised $7.2 billion in the largest IPO in the history of Brazil. But by December 1, the shares had lost as much as 11% of their value. It didn’t help matters that Brazil imposed a 2% tax on foreign purchase of the stocks. Still Deutsche predicts earnings per share to grow 56% in 2010 and 24% in 2011. This is above the Brazilian average of around 20% a year. Brazil might be doing a lot of things right, but when we put our money into anything and hope for a return, remember to look at the big picture—you're rolling dice on a world-wide crap table. No country operates in a vacuum. To a great extent, as the world's economies go, so goes Brazil's. And as we stress in our book, The Big Gamble, it's all speculation! |
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