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Smart Investment Guide to Brazil

Stocks in this article: GOL TAM BBD

NEW YORK ( TheStreet) -- As host of the FIFA World Cup (2014) and the Olympic Games (2016), Brazil will accelerate private and public sector spending beginning this year, providing excellent opportunities for long-term investors.

In the coming years, both private and public spending will continue to outpace GDP growth, in line with the increasing domestic demand. However, a widening current account deficit and increasing interest rates present downside risks, during 2010.

After a modest economic downturn in 2009, Brazil's GDP expanded 9% year over year during the first quarter of 2010 on robust domestic consumption and new investments. For the full year 2010, the economy is forecasted to grow 7.13%, the fastest since 1994.

Inflation kept pace with the growing economy reaching 5.2% in May, above the central bank's target rate of 4%. The central bank has already hiked interest rates to 10.25% from 8.75%, in an effort to contain inflation.

Currently, Brazil's Bovespa Index is trading at a PE multiple of 13.1 compared to 14.9 of the S&P 500 Index. In comparison, China's Shanghai Composite Index and India's BSE Index are trading at higher PE multiples of 17.6 and 17.9, respectively. At the current prices, Brazil market provides an attractive opportunity for higher returns.

After looking at several sectors of Brazil, oil and gas, metals and mining; and food and beverages are the top three sectors to play with the Brazil stocks. The outlook for the airlines and chemicals sectors remains bleak on intense competition.


The Brazilian National Civil Aviation Agency's air traffic statistics indicate that load factor for May 2010 was 60.3% in the domestic market, a 1.1% increase year over year.

The increase in air traffic for U.S.-listed Brazil airline companies Gol Linhas Aereas Inteligentes (GOL) and TAM (TAM) was 14.9% and 9.4%, respectively, below the industry's demand growth of 20.1%.

Both these major airline companies reported load factors below the industry's average, according to Banco Factor. As smaller companies are gaining market share at the expense of major airlines, the industry could witness a price war, similar to U.S. airline industry, if similar trends continue in the industry. In the current scenario of slower growth in Brazil's air travel, a price war will lead to lower profitability for the industry. The sector's outlook remains bleak, at least in the short-term.

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