Brazil: Big and Getting Bigger
With a population of nearly 180 million and an area of 3.2 million square miles, Brazil is the largest and most populous country in Latin America. It has made amazing strides since emerging from military rule in 1985 and is undeniably is the leading economic power in South America. Politically, Brazil manages to have friendly relations with the U.S. as well as with its left-leaning neighbors.
The currency, the real has enjoyed a big run-up in the last two years. Inflation has been curtailed and overall the economy is growing faster than expected..Brazil is rich in minerals such as gold, iron ore, nickel, platinum and tin, among others. It can more than met its energy needs, with reserves of oil, uranium and hydro-power. It has one of the largest reserves of fresh water on the planet and its offshore oil fields discovered last year are even larger than first estimated.
Known for its agricultural products, Brazil is attracting expatriates, including U.S. citizens, to buy and operate farmland. A global leader in biofuels. Brazil has been producing ethanol from sugar cane since the 1970s (This is cheaper than making it from corn.) A total of 80% of all vehicles in the country now use ethanol or an ethanol-gasoline mixture. By law, gasoline must contain a minimum of 25% alcohol or E-25. Despite high tariffs, the U.S. is buying ethanol from Brazil, where farmers there are increasingly replacing their soybean crops with sugarcane.
In spite of the country’s economic progress, there remains an enormous gap between rich and poor in Brazil. The World Bank, ranks Brazil second only to South Africa in inequality and the northeast region has the single largest concentration of rural poverty in Latin America. Another negative is that business people have difficulty navigating the bureaucratic regulations and the tax system.
Nevertheless, Brazil’s Bovespa Index has surged 41 % this year before taking a downturn in late November. Brazilian stocks returned 33% in 2006 and 44% through the end of October of 2007, though it has been far from a smooth ride. The index sank 7.5% after hitting its latest all-time high on Oct. 31.
The only closed-end fund focusing exclusively on Brazil is iShares MSCI Brazil Index Fund (EWZ), which seeks to offer returns corresponding generally to the performance of publicly traded securities in the Brazilian market, as measured by the MSCI Brazil Index. It is the top-performing iShares fund through November 23 for three-months at 34.0% and year-to-date, 65.3%, as well as three- and five-year annualized returns, both of which are above 60%.
Its holdings include the preferred and common stock of multinationals companies Cia.Vale do Rio Doce (RIO), the world’s largest iron ore producer and Petroleo Brasileiro SA (PBR). Note that both of these companies are under the control of the state. Other major holdings are Banco Bradesco (BBD), Banco Itau (ITU), Cia De Bebidas Das Ame (ABV), Unibanco-units (UBB). Gerdau (GGB) and Cia Siderurgica Nacional (SID).
Investors interested in large cap stocks may want to investigate some of the individual companies. Since the large caps have already enjoyed impressive gains, some strategists recommend Brazilian small caps such as processed meat company Perdigo (PDA), Cyrela Brazil Realty (CYRBY) and Brazil Fast Food (BOBS). The last two are sold OTC. Do your own due diligence. In the interests of full disclosure, I currently have a small position in RIO.