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By now, we all know the recent investment-grade status of Brazil's sovereign debt, the large oil discoveries by
, and the vast mineral reserves held by
. 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
, 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
( ITU) or
Brazilian consumerism is on the upswing -- how about a retail play like
Companhia Brasileira de Distribuicao
They are eating higher quality foods, how about some nice juicy shares of
( PDA) or
Would you like a nice cold beer with that steak? How about
And home purchases are also picking up, so how about looking at middle-market homebuilder
Let me share an anecdote that exemplifies my opinion that we are tapping into the big consumer engine. On my recent trip, I spoke with several friends and acquaintances about the state of the Brazilian economy. Outside of the typical platitudes, one example stood out.
A good friend's family owns and operates factories that make retail products and clothing (sweaters, pants, shirts, etc.). For many years, their business mostly came from outside of the country (U.S., Europe, Canada). But now, 100% of their business is domestic. The factories are operating at full capacity, and they say that they have demand for 50% more than they can handle. This is the first time that the demand is coming completely and solely from the domestic consumer.
Investing in Brazil does not begin and end with Petrobras and Vale. Think bigger. Think about the new Brazilian middle class and consumer who is ready, willing and able to spend like Americans in the 1990s.
I am very bullish on Brazil, but in no way do I want to give the impression that Brazil is the perfect investment opportunity. In fact, it is far from perfect. In my
, I will detail a personal encounter with the institutionalized crime and corruption that plagues this emerging economy.
This was originally published on
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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.