That said, investors expected too much from the Brazilian economy and market last year following a strong 2010. Now that expectations have become more realistic, the relative strength of Brazil’s economy makes allocating some funds to this market a smart move.
The Brazilian economy has been run in a characteristically sober fashion for the past 10 years, especially when compared to its Latin American peers. Brazil was a no-show at the credit-expansion and easy-money party of the past decade.
Brazil’s net public debt as a percentage to gross domestic product (GDP) peaked at about 63 percent in 2003, and reached a low of about 35 percent in 2008. Currently the figure stands at about 37 percent of GDP and should continue to fall to 2008 levels this year.
Brazil took advantage of the recent commodity boom to accumulate vast amounts of foreign reserves. Brazil now holds about USD352 billion in foreign reserves in its coffers, funds that can be used to support the economy amid periods of high capital outflows. These foreign reserves can also be deployed as needed to pay down debt.
Brazil doesn’t face an imminent deflationary cycle as the country boasts strong employment and credit growth. Although inflation is manageable, it remains a red flag.
Unemployment of 6 percent is close to historical lows and represents a sharp reduction from the unemployment rate of 13 percent in 2003. Meanwhile, the country’s minimum wage for workers and retirees was recently boosted by 14 percent to USD350 per month. By contrast, the country’s official poverty line is demarcated at a monthly wage of about USD40.
In contrast to other emerging markets, the investment case for Brazil isn’t based on explosive GDP growth and gangbuster earnings growth. We expect Brazil’s economy will continue to grow steadily, particularly when compared to developed economies. Given Brazil’s strong fundamentals, economic growth could surprise to the upside when the global economy finally finds its footing.
Long-term readers are familiar with the preference here of holding, among other things, banks when it comes to emerging markets. The Brazilian banking sector has been posting decent results and banking stocks trade at attractive valuations. In addition, banks are the largest non-commodity sector in the Brazilian market and should benefit as investment flows return to the country.
The stock investors should look into when considering investing in the country’s banking sector is Banco Bradesco (NYSE: BBD), Brazil’s second-largest private bank with over 40 million customers and more than 4,000 braches. The lender controls around 15 percent of the market in terms of assets. Banco Bradesco also boasts sizeable leasing, insurance, private pension funds, and asset management business lines.
The bank is famous for its superior asset quality and its conservative loan policies. As a result, its non-performing loan (NPL) ratio is around 5 percent, and should continue to hover at this level.
Banco Bradesco’s insurance business (30 percent of earnings) is one of the best run in the country. Additionally, this unit has shown resilience throughout the economic cycle and could offset a lackluster performance in the bank’s other units as the global economy slows.
The bank’s insurance business controls 50 percent of the country’s health insurance market, 28 percent of Brazil’s life insurance market, 21 percent of the country’s market for pension plans and 10 percent of the auto insurance market.
Rising incomes and the strength of Banco Bradesco’s brand should drive customers to its insurance offerings. Insurance premiums represent only 3.4 percent of Brazil’s gross domestic product, compared to about 7 percent to 8 percent in developed countries, leaving ample room for growth. The stock trades at 9 times expected earnings and 1.8 times expected book value. Investors will also receive a 3.6 percent dividend yield.
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