Friday, May 16, 2008

Brazil is Sexy...

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... and not just for obvious reasons (don't you dare click to enlarge photo). While I've been a long time Brazilian bull, we are starting to see it more and more in the popular press. Which is beginning to get me nervous. The more something turns into a consensus, the more crowded a trade becomes (in the near term). The long term does not change of course...

There are a limited amount of ways to play Brazil for American investors. We have energy giant Petrobras (PBR), mining giant Vale [formerly CVRD] (RIO), 2 major steel makers Gerdau (GGB) and Companhia Siderugica (SID), 2 major banks Bradesco (BBD) and Banco Itau (ITU) (no subprime I promise), homebuilder Gafisa (GFA), and a few regional consumer related names, along with an airline. Or iShares Brazil (EWZ) if you want the country ETF (but its top heavy in PBR and RIO)

Now compare that to China where we are flooded with a hundred companies of all shapes, sizes, and hype. With that said, as I keep saying, Americans are very inward looking people with belief that if it does not happen "here", it does not matter. That's a quite arrogant/narcissistic attitude that is coming home to roost. And if said attitude continues it will consistently hurt us more and more, as many other parts of the world grow, evolve, and prosper. Much of it happening with our dollars, as our massive debt/consumption finances their upswing in lifestyles. [Jan 21: A Tour Through the Middle East] With eyes closed to it, it can only hurt more.

Here are two stories just in the past few days

Wall Street Journal: Brazil Joins Front Rank of New Economic Powers
  • For much of the decade, slow-growing Brazil seemed out of its league lumped in with the dynamic emerging economies of Russia, India and China in the so-called BRIC group.
  • But slowly and without great fanfare, Brazil's economy has turned a big corner. Already a global power in agriculture and natural resources, Brazil has added a key ingredient that had long eluded it: a currency with staying power. (we used to have one of those) In turn, that's helping unleash the greatest burst of prosperity the country has witnessed in three decades, attracting foreign investors by the score and providing a growth engine for a flagging global economy.
  • Brazil has enough money lying around that Monday it announced it would follow other booming countries like China and Persian Gulf oil states in setting up a sovereign-wealth fund, worth between $10 billion and $20 billion, to invest its excess cash. (money lying around?... interesting concept - we don't believe in that here)
  • Brazil's newfound stability has elevated millions of poor Brazilians into the middle class, making it the largest population bracket in a nation long known for having only haves and have-nots. (as opposed to some countries going in the opposite direction....)
  • On April 30, another piece fell into place for Brazil when Wall Street ratings firm Standard & Poor's upgraded Brazil's debt to "investment grade" -- making Brazil the last of the BRIC nations to have its creditworthiness win that coveted seal of approval.
  • The nation of 190 million inhabitants hasn't shed all its economic perils. Much of its economic surge is riding on soaring commodities prices, including agrarian products, oil and minerals; a reversal would be deeply felt. (very valid)
  • But Mr. da Silva has proven himself an adept bridge builder who seems equally at home having barbecue with George Bush or drinking cafe cubano with Raul Castro. "Brazil doesn't really have any enemies," That's just fine with investors who see Brazil as a relatively safe haven, a resource-rich democracy that's growing steadily, if not spectacularly, in a quiet corner of the world.
  • Brazil is the only one of the four big emerging economies without nuclear weapons.
  • Brazil was awash in foreign capital, much of it directed toward brick-and-mortar projects.
  • On the outskirts of Rio de Janeiro, 13,000 laborers are working overtime to build German industrial giant ThyssenKrupp AG's new $4.6 billion steel plant, the largest mill to be built in Brazil in 20 years. Mexican billionaire Ricardo Salinas recently made a whirlwind visit to historically impoverished, but now economically surging, Northeastern Brazil to launch a chain of banks aimed at low-income clients. Illiterate clients will be able to register accounts using their fingerprints. International oil companies, such as Statoil SA of Norway and Royal Dutch Shell PLC, are set to invest $25 billion in Brazil in the coming years, according to Brazil's industry association for foreign oil companies. Alcoa Inc. is putting $2 billion into hydroelectric power, mining and smelting projects throughout Brazil -- the company's most ambitious investment program anywhere.
  • Brazil lacks the savings and investment rates of China and India. But Brazil has reached a more mature stage of development than China and India -- with a larger share of the population urbanized and higher per capita wealth -- so it's simply less likely to take giant leaps these days.
  • Since 2005... The percentage of middle-class Brazilians has grown to 46% from 34%.
MSNMoney: Booming Brazil. The New China.
  • If there is a single word to sum up the global rallies in steel, iron ore, gold, grains and energy over the past three years, it is Brazil. It's not an exaggeration to suggest investors should now look upon the former Portuguese colony as the new China -- a top dog among global economic powerhouses that smart investors ignore at their peril.
  • Although the nation's key Bovespa Index is up 535% since 2003 -- almost nine times the return of our Standard & Poor's 500 Index ($INX) -- it does not appear to be overvalued. Brazil's big industrial companies are still cheap, mostly because their story is not yet fully believed. They are not getting the credit they deserve as fiscally clean giants in a country largely free of the extreme corruption, political disharmony and waste that has hampered peers in emerging markets.
  • Most analysts date Brazil's turnaround to the presidential election of Luiz InĂ¡cio Lula da Silva (or as we call him 'Lula'!). Virtually from the moment he took office in 2003, Brazilian stocks threw off a long-term bear market and got their bull on. Yet Silva stunned the world by putting competent pragmatists in key positions as central bank chief and finance minister. (Wow pragmatists as opposed to people beholden to Wall Street and the top 0.5%? Interesting concept - it would be nice if we could go back to that sort of thing here)
  • Silva was aided in his quest to grow Brazil into an export powerhouse by a decision by military dictators in the 1970s to commit the country to self-sufficiency in energy. At the time, it meant the widespread development of the nation's vast sugar cane crop as an efficient feedstock for ethanol. Most Brazilian cars and trucks now run on pure ethanol, a mix of ethanol and gasoline, or natural gas cheaply procured from neighboring Bolivia. (ok so a long term vision that runs longer than 1 election cycle? Thinking ahead 10, 15, 20 years? Hmm... interesting - and whom is the 3rd world country exactly?)
  • There's much more to Brazil's agriculture than sugar cane, though, as its tropical climate allows for two growing seasons. The country has the world's largest amount of uncultivated arable land, and farmers, in league with Japanese and U.S. agribusiness leaders Cargill, Bunge (BG, news, msgs) and Monsanto (MON, news, msgs), are steadily moving into the western steppes to grow more soybeans, wheat and alfalfa, as well as graze the world's largest cattle herds to satisfy a growing world hunger for protein.
  • And the mining industry has exploded under the nearly monopolistic direction of Vale (RIO, news, msgs). Vale's shares have risen almost 1,700% since Silva took office and his finance team started selling the government's share of the company to the public. The second-largest mining concern in the world, Vale produces iron ore, nickel, copper, bauxite and aluminum, and runs nine hydroelectric plants to supply the world with raw materials.
  • Though Brazil has China beat with native sources of food and natural resources, its expensive currency and smaller population have stymied efforts to create much of a manufacturing sector. Brazilian industrial outfits such as steel maker Gerdau (GGB, news, msgs) have ventured overseas to buy and distribute high-grade metal plate, and Embraer (ERJ, news, msgs) has hawked commercial jets. But mainly due to high tariffs and bad luck, the only Brazilian goods you'll likely buy in the U.S. are cooking oil, carved wood and orange juice.
  • To be sure, Brazil is not perfect. Around a third of Brazilians live in poverty, and the median income of households badly trails that of Mexico and Chile. Yet economic growth around 4.7% and a sharp drop in inflation (which had topped 100% in the 1990s) have spurred growth in a middle class that is avidly buying wireless phones and refrigerators, traveling and going to college.
  • In short, Brazil is China without a totalitarian government, lack of water or natural resources, or Tibet problem. It's an emerging market with real hope of sustainability.
Long Petrobras, Gafisa, Vale in fund; no personal position

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