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Brazil is the Best Emerging Market

By Jim Fink on March 1, 2011

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Brazil is a great long-term opportunity on many different fronts.

– Yiannis Mostrous, Global Investment Strategist

Since the beginning of the global financial crisis in 2008, only one BRIC (Brazil, Russia, India, China) stock market has advanced: Brazil. Take a look at the numbers:

BRIC Country

Stock Market Return Since Dec. 2007

Brazil

4.3%

Russia

-18.3%

China

-22.7%

India

-33.6%

Source: Bloomberg

Why has Brazil performed so much better? According to Yiannis Mostrous, lead advisor of the market-beating Global Investment Strategist, an investment service devoted to emerging markets, Brazil’s outperformance is due to many factors. In an article last year entitled Brazil is Latin America, Yiannis outlined three of Brazil’s advantages:

1. Low Public Debt

Brazil’s public net debt reached a decade-low 35 percent at the end of 2008. Brazil also took advantage of the commodity boom to accumulate vast foreign reserves, the excess of which is now available to supplement public finances during times of capital outflows. The Brazilian government is not afraid to cut spending to safeguard sustainable economic growth. I wish President Obama felt the same way.

2. Rational Interest Rates

While the rest of the world engorged itself on cheap money, real interest rates in Brazil remained in the mid-teens. Decisions to allocate capital involved serious thought, as opposed to the perverse, you’re-dumb-if-you-don’t incentive structure established by easy-money policies in the US. As a result, Brazil’s financial system was spared a lot of bad investments.

3. High Savings Rate

Gross savings stood at 18.5 percent of GDP at the start of the crisis and dropped to a still-healthy 15.5 percent by the end of 2009.

Not all BRICs are Created Equal When it Comes to Energy

Although all of the BRIC countries have growing middle classes with increasing aggregate consumer demand, the BRICs differ markedly in their dependence on foreign sources of energy and food. Brazil and Russia have achieved energy independence, which is a huge advantage during times of high oil prices. Take a look at the list of the top 10 countries that the U.S. imported petroleum products from during December 2010:

Country

Imports to U.S. (Barrels per Day)

Canada

2.71 million

Mexico

1.37 million

Saudi Arabia

1.09 million

Nigeria

1.07 million

Venezuela

917,000

Russia

514,000

Algeria

484,000

Iraq

336,000

Angola

319,000

Brazil

295,000

Source: Energy Information Agency

Both Russia and Brazil are on the list. In contrast, China and India are nowhere to be found because they are not energy independent and need to pay top dollar scrounging for energy worldwide in times of tight supplies. High energy prices act like a tax increase on domestic economies that hurts growth, so energy independence is a big advantage for any economy.

Sugar-Based Biofuels

Brazil supplements its ample oil supplies from Petrobras (NYSE: PBR) with a world-class biofuels industry based on sugarcane and ethanol production.  The one weak spot for Brazil is a shortage of refining capacity, but Brazil forecasts that it will stop needing to import refined petroleum products such as diesel by 2017.

Metals, Especially Iron Ore

Besides energy, the other big natural-resource imports are food and iron ore for steelmaking. Brazil has both of these natural resources in spades. Brazilian company Vale (NYSE: VALE) is one of the premier mining companies on the planet and the world’s largest producer of iron ore.

Food and Water

The world is facing a global food crisis. Click on this chart to see that both Brazil and Russia are net exporters of food. In contrast, India is flat and China is a net importer. According to the United Nations Food and Agriculture Organization (FAO), Brazil has more spare farmland than any other country in the world and more than the U.S. and Russia put together. In fact, U.S. farmers are actually moving to Brazil to take advantage of the cheap farm land and excellent growing seasons. Don’t worry about irrigation; Brazil also has more water than any other country and alone has as much water as all of Asia! This is very good news for Brazil because, as Yiannis Mostrous of the Global Investment Strategist has written, potable water is becoming the new oil:

Within the next two generations, water is expected to become the most important commodity in the world, easily surpassing oil.

World Cup and Olympics

Brazil is hosting the 2014 World Cup and the 2016 Olympics. Both events will shine a light on Brazil and increase investor interest, not to mention spur economic growth from construction and tourism. Brazil is probably a golden investment opportunity until 2016.

Find the Best Brazilian Stocks with the Help of  Global Investment Strategist

I would wager that Brazil’s natural-resource advantages will keep Brazil at the top of the emerging-market investment scene for years to come. The question remains how can investors take advantage? The best way is to take a subscription to Yiannis’ Global Investment Strategist, but a hint can be found in the Brazil is Latin America article Yiannis wrote one year ago, where he makes the following positive comments about oil company Petrobras and iron ore miner Vale:

Petrobras: “Over the last several years Brazil’s national oil company has announced the discovery of some of the largest oil and natural gas fields in decades. All told, Petrobras has plans to boost production to near 6 million barrels per day by 2020 — among the most aggressive expansion plans in the world.”

Vale: “World’s largest producer and exporter of iron ore and pellets. The iron ore sector should perform well for years to come. Also, Vale has been gaining over upstart Indian producers because it offers a higher-quality iron that buyers favor.”

Both Petrobras and Vale recently reported record earnings, so their prospects remain strong. Whether Yiannis recommends them now, however, only subscribers to Global Investment Strategist know for sure.

To find out which Brazilian stocks Yiannis likes best right now, give Global Investment Strategist a try today!

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