Turning a Corner Down South

Investors taking another look at Brazil after raft of good news.
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In researching my story last week on

Mexico, I was struck by the number of fund managers who were more intrigued with investing in Brazil than Mexico. It was surprising since Mexico has had a streak of good news, culminating in an upgrade by

Moody's Investor Services

on Mexico's sovereign debt rating to investment grade. At the very least, that upgrade meant more institutional investors would enter Mexico, brightening the picture for retail investors as well.

On the other hand, last time I checked

Brazil, the country had stalled on necessary economic reforms, was witnessing a return of inflation and was burdened by high levels of short-term debt held by the government. While the market overall was up 152% in local currency in 1999, I was nervous about the prospects for investing in the country, despite the huge potential for South America's largest nation.

My first reaction after speaking with the Brazilian bulls: Someone's still heady from last week's

carnival

celebrations. A little bit too much samba in the sun, I thought.

But, lo and behold, it seems that Brazil may have turned a corner. The increase in inflation that occurred last fall looks like a blip. The government estimates it to be 6% this year, although

Merrill Lynch

guesses it will be a little over 7% -- either way, not bad for Brazil. Exports have finally picked up, a long-awaited result of the January 1999

real

devaluation, and the current account deficit is falling as a percentage of GDP, according to Sergio Goldman, Brazil equity strategist at

Paribas

, who is based in Sao Paulo. Industrial production has improved monthly. In addition, the government's fiscal picture is improving, and it is within targets set by the

International Monetary Fund

. Estimates for GDP growth this year are in the 3% range.

Despite the sound statistics and the bullishness of the fund managers with whom I spoke, Goldman thinks many investors are holding off putting their money into Brazil. "What is postponing investors is the international environment," he says, alluding to the possibility of a major stock market setback in the U.S. However, that hesitation means now is a "good time to get in," he says, noting the Brazilian market is down around 8% the last few days.

Jonathan Lemco, an analyst for

KWR International

, agrees. "Brazilian shares are valued at 12 to 13 times forecast 2000 earnings, and are among the cheapest and most liquid in Latin America," he recently wrote for the investment advisory firm's newsletter.

As to where to look for investment opportunities in the country, "Telecom is the hot sector in Brazil," says Goldman. Goldman likes telecom because of tremendous growth potential and efficiency gains he expects to occur soon. Two companies stand out: Brazilian telecom leader

Telebras

(RTB)

, which has dropped 10% over the last couple of weeks, but has still more than doubled since last fall. Another telecom firm,

Telesp Celular Participacoes S.A.

(TCP) - Get Report

, has dropped 20% since late February, although it has also doubled since the fall.

Goldman also likes the oil sector, especially

Petrobras

. For those intrigued by the growth of the Internet in Brazil, check out cable TV provider

Globo Cabo

(GLCBY)

, which has recently positioned itself as a broadband service provider in the nation. Its stock has dipped around 25% in the last couple of weeks, yet it has still quadrupled since the fall.

Despite the buying opportunities in Brazil, the risks of investing there are still considerable. Most importantly, economic reform will continue to be shaky at best. While investors buy companies, not countries, that will translate into greater market volatility. Thus, it makes sense to look at Latin American mutual funds, while beefing up their Brazilian holdings. The best performers this year are the

Excelsior

(UMEAX)

Latin American fund, up 12.9% this year; the

Templeton

(TLAAX)

Latin America fund, up 11%; and the

T. Rowe Price

(PRLAX) - Get Report

Latin America fund, which has risen 10.6% this year.

Brazil looks better these days, but while evaluating the risk, investors should keep in mind the old saying about Brazil. Brazilians like to say that their nation is the country of the future -- always.

David Kurapka's Trade Winds column appears Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

dkurapka@thestreet.com.