Brazil's Next Growth Catalyst: The Middle Class

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By now, we all know the recent investment-grade status of Brazil's sovereign debt, the large oil discoveries by Petrobras (PBR Quote), and the vast mineral reserves held by Vale (RIO Quote). But, there is so much more to this upside story.

In my opinion, the next growth catalyst will be the Brazilian consumer and formation of the Brazilian middle class.

Many investors in Brazil think that the opportunity begins and ends with commodities and minerals. This is much too short-sighted. I believe that Brazil is now entering the next leg of growth -- domestic demand.

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As the average Brazilian household begins to accumulate wealth and real disposable income, the next phase will kick in. We are starting to see it now. Think of Petrobras and Vale as the appetizers, with the creation of the middle class as the grand feast or, more appropriately, "churrasco" (Portuguese word for the fabulous Brazilian-style barbeque that I highly recommend).

The formation of a Brazilian middle class will be a powerful generation-long boom cycle, not just the few years of a typical economic cycle. Think of Brazil as America in the post-World War II era -- massive construction, massive consumer consumption and massive optimism.

How powerful is the consumer in the economy? In the U.S., the consumer accounts for roughly 70% of GDP, in Brazil, they account for roughly 60%.

To take advantage of this new road to profits, invest with the new middle class in mind. Brazilians are just starting to save and invest. Credit growth is rampant. How about Banco Bradesco (BBD Quote), Banco Itau (ITU Quote) or Unibanco (UBB Quote)?

Brazilian consumerism is on the upswing -- how about a retail play like Companhia Brasileira de Distribuicao (CBD Quote)?

They are eating higher quality foods, how about some nice juicy shares of Perdigao (PDA Quote) or Sadia (SDA Quote)?