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A Pipeline to Brazil's Growth

Stocks in this article: BRXX EWX PBR VALE

NEW YORK TheStreet -- Over the weekend Barron's devoted two articles to investing in Brazil. During the 2000s, U.S. investors became more aware of Brazil as an investment destination as its natural resources were crucial to China's growth. At the same time the investment product industry offered more mutual funds and ETFs making access much easier.

During that last decade the benchmark Brazilian Bovespa Index was up more than 300%. The future prospects are generally bright as Brazil has a lot of stuff in the ground the world needs, offering the promise of a more prosperous society.

Like all investment stories though, Brazil has evolved. The largest companies now face a heavier government hand in the form of regulation and as a middle class has started to emerge, consumer debt has also increased meaningfully.

Regulation can impede growth and more consumer debt can lead to irresponsible use of debt. As we saw in the U.S., that can have serious consequences for the economy and capital markets.

The easy ETF choice for investing in Brazil is the iShares MSCI Brazil Index Fund (EWZ) but it squarely faces the risks highlighted in Barron's; regulation of the largest companies like oil giant Petrobras (PBR), mining giant Vale (VALE) and the largest Brazilian banks which all account for 40% of EWZ. The banks also take on the risk should consumer debt get out of hand.

Brazil will be hosting the 2014 World Cup and the 2016 Olympics, but this was barely mentioned in passing in Barron's, with one analyst quipping that "Petrobras' annual capital expenditure is more than the World Cup is going to cost." That might be true but the country is slated to spend $125 billion on infrastructure needs; given that Petrobras is the largest company in Brazil by far and many other smaller companies are involved with infrastructure, the $125 billion figure should be very meaningful.

This opens the door to consider the EG Shares Brazil Infrastructure ETF (BRXX) as a way to access the country. BRXX has a little exposure to the mega caps with VALE's 5% weighting but BRXX' average market cap is $13 billion vs. $31 billion for EWZ.

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