Invest in Brazil’s Resource-Rich Economy

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The Brazilian phrase boa pra caramba may be the best way to describe its economic miracle. Within the lifespan of most of its residents, the country has faced significant economic turmoil, survived a military dictatorship and grew its gross domestic product (GDP) from $15 billion in 1960 to the world’s seventh largest economy breaking $2 trillion in 2011. That’s surprising by anyone’s standards.

Since 2003, Brazil has improved its macroeconomic stability, built up its foreign reserves and reduced its debt by converting it to real-denominated and domestic securities. Then, in 2008, the country’s debt was awarded investment grade status by two credit agencies. After a moderate recession. the country returned to positive growth in 2010 and continues to be an attractive destination for investors.

An Overview of Brazil’s Economy

International investors know Brazil best for its rich natural resources. In addition to its extensive offshore oil fields, the country is the second largest producer of iron-ore in the world and produces more ethanol than Asia and Europe combined. These resources help it cheaply produce a wide variety of industrial and consumer goods, while serving as a key raw material supplier to countries like China.

The country’s 2010 economic statistics included:

• Gross Domestic Product (PPP): $2.172 Trillion
• GDP Real Growth Rate: +7.5%
• GDP per Capita: $10,800
• Unemployment Rate: 7.0%
• Inflation Rate (CPI): 4.9%

The Benefits and Risks of Investing in Brazil

Like most emerging markets, investing in Brazil involves a trade-off between risk and reward. The country’s high growth rates may produce strong returns, but political instability and export-dependence make it riskier than developed markets. Still, the MSCI Brazil Index has outperformed the U.S. S&P 500 by more than 50% over the past five years and 375% over the past ten years.

The benefits of investing in Brazil include:

• Strong Growth Rates. Brazil’s economic growth has benefited from strong demand in China and other emerging markets for its natural resources, while its oil independence has helped it avoid domestic growth problems associated with high oil prices.
• Relatively Stable Economy. After taking steps towards fiscal stability and liberalizing its economy in the 1990s, Brazil has become a top-tier economy with a growing technological sector and an inward focus that should produce sustainable growth rates over the long-term.
• Rich in Natural Resources. Brazil is the second largest producer of iron-ore in the world and home to one of the largest offshore oil discoveries in decades. This has helped it build a base from which it has developed a sophisticated technology sector and growing domestic economy.

The risks of investing in Brazil include:

• Political Instability. Brazil has a somewhat volatile political history that remains persistent even today. As recently as 2011, the government arrested a number of officials, including its deputy minister of tourism, on suspicion of siphoning off public money.
• Foreign Dependence. Brazil is more dependent on exports than developed countries like the United States, while it also relies heavily on external financing and its current account deficit. Any downturn in global demand or financing from abroad could have negative results.

The Best Ways to Invest in Brazil

There are many different ways to invest in Brazil, ranging from U.S.-listed exchange-traded funds (ETFs) to securities listed on its own stock exchange, the MB&F Bovespa. ETFs represent the easiest way to gain exposure without worrying about American Depository Receipts (ADRs) and domestic securities.

Popular Brazilian ETFs include:

• iShares MSCI Brazil Index ETF (NYSE: EWZ )
• iShares MSCI Brazil Small Cap Index ETF (NYSE: BRF )
• Global X Brazil Consumer ETF (NYSE: BRAQ )
• Global X Brazil Financials ETF (NYSE: BRAF )
• Global X Brazil Mid Cap ETF (NYSE: BRAZ )

Brazil’s most popular ADRs include:

• Petroleo Braziliero SA ADR (NYSE: PBR )
• Vale ADR (NYSE: VALE )
• Itau Unibanco Holding SA ADR (NYSE: ITUB )

International investors looking for direct exposure can purchase Brazilian securities directly through many global trading platforms with access to the MB&F Bovespa. Those looking to invest directly need to engage local entities to act as custodians on brokerage accounts and register with the Brazilian Central Bank and other regulatory and tax agencies.

The most popular index on the MB&F Bovespa is the Bovespa Index (IBovespa) which accounts for about 80% of trading volume and 70% of the exchange’s total market capitalization.

Key Takeaway Points

• Brazil is one of the world’s fastest growing countries and a member of the so-called BRIC nations, but it also has several risks embedded in its politics and foreign dependence.
• Those looking for an easy way to invest in Brazil should look at ETFs and ADRs, while those looking for more direct access can open a foreign brokerage account and trade on the MB&F Bovespa.