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Brazil has been a much-discussed topic in investing circles for some time now, and having just returned from a recent trip there, I am eager to share with
subscribers my "boots on the ground" notes and perspective.
It was instructive and fascinating to be a front-and-center spectator not only of the vibrancy of Brazil's blossoming economy and free market, but also of its captivating and energetic culture. Contrary to what Charles de Gaulle of France once wryly described as "not a serious country," the largest nation in South America, with a population more than 190 million people, is quickly becoming not only a regional powerhouse, but a major player on the global stage.
In this multipart look at Brazil, my aim is to shed some light on where we are in the Brazilian growth cycle; to break down my trip, with regard to the many investment opportunities available; and I'll finish with a personal anecdote summing up the overwhelming challenges of its ugly legacy of crime and corruption.
China Watch: Brazil's One Way In (Video)
One way to get in on the action with China is to play Brazilian companies with Chinese connections. Patrick Schultz reveals how we can play one emerging market to play another.
To watch the video, click the player below:
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Plus, don't miss China Watch Mail Bag: Best Brazil Bets.
Brazil has a wide range of investment opportunities, but to understand where it can go, a few facts are necessary to appreciate where Brazil has been. With so much fawning over China and India, it may surprise many that the benchmark
is the best-performing index of all the emerging-market BRIC countries on year-to-date and two-year time frames.
Two years ago
Year to date
YTD date %
Brazil -- Ibovespa
India -- BSE Sensex
China -- Shanghai Composite
Russia -- RTS Index
I believe Brazil is a country that's just starting its upswing. I don't fear the rapid boom followed by the fated and ugly bust that has plagued this country for decades. I believe Brazil is still in the early innings of a powerful global game of wealth creation.
This early-cycle investment thesis around Brazil -- let's call it "early capitalistic investing" -- is rooted in four basic pillars: arable land for agriculture, commodities for basic materials, oil from massive offshore discoveries and environmental expertise in ethanol and flex-fuel technology.
These secular drivers are still budding, and their stocks are in rip-roaring bull mode. I see no material drop in global demand for any of these pillars of growth (think China, India, Russia, Africa). If anything, I see demand increasing.
Here are some eye-catching stats about Brazil:
- It has the world's largest farm-trade surplus at $27.5 billion -- compared with the U.S.' $4.5 billion, for example.
- Brazil's GDP went from $1.340 trillion in 2003 to $1.838 trillion in 2007, for growth of 37.1%.
- Since early 2003, the Brazilian real currency has returned over 50% against the greenback, which is now trading at R$1.63 (ouch for me on this trip).
- Brazilian interest rates in early 2003 hovered around an incredible 26.50% but are now vastly lower at 12.25%, allowing for additional capital and credit formation.
- Brazil's trade surplus rose to $4.08 billion in May, its highest level so far this year. Brazil is now a net creditor that paid back IMF loans early. In fact, the government has started on launching a sovereign wealth fund to invest capital surpluses.
- The country reached complete energy independence in 2006. In 2007, renewable sources of energy represented 45% of total production, compared with a world average of 14%.
I don't hold Pollyanna notions that Brazil is the perfect investment scenario (does such a thing exist?), as crime and corruption are rampant. The corruption is systemic and institutional and is so corrosive that it must be acknowledged and confronted, or all of these potential opportunities will be ephemeral. This overriding concern on the Brazilian economy and society is the linchpin of a bright future or a doomed repeat of history.
In my opinion, Brazil as a whole currently represents a much better investment environment than does the U.S.
Warren Buffett seems to agree with me, to at least some degree. For some time, Buffet held a mystery currency position that was later revealed to be the Brazilian real. In a
interview in February, Buffet said:
The only currency we hold now is the Brazilian real. If you grew up like I did, then having a holding in Brazilian currency, you would have been committed someplace. In the last five years, the Brazilian real has doubled in value against the U.S. dollar, so if you were a Brazilian and you put your money in the American dollar, you lost half your net worth in your home country. And the outstanding thing about that is that during much of that period the Brazilian central bank was supporting the U.S. dollar.
This is but one example of how things have changed for Brazil over the past several years. The story of Brazil is exciting, and in my opinion, it all starts with two companies,
, both of which which I will discuss in the
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Patrick Schultz is a research associate at TheStreet.com. He has previously obtained securities licenses under the NASD's Series 7, Series 24, Series 52 and Series 63 exams and has worked in the financial markets on various trading desks in addition to trading for his own account. Schultz holds a bachelor's degree in applied economics from Cornell University.