How to Profit from Brazil’s Booming Internal Growth!

During his visit to Brazil two weeks ago, President Obama praised Brazil for its transformation into a thriving and increasingly affluent country. And I couldn’t agree more!

In the last decade, Brazil has seen more than 30 million people lifted into the middle class. And it is now the seventh-largest economy in the world.

On several fronts, Brazil is one of the leaders …

It is the world’s largest exporter of ethanol and second largest producer (the U.S. is the largest).

Brazil is the world’s biggest exporter of orange juice.

And it is also a major exporter of beef and poultry.

Now Brazil has one of the strongest currencies in the world.

The Brazilian real gained nearly 3.4 percent last week against the dollar, as money flooded in. You can see in the chart below that year-to-date the real has appreciated against major currencies like the U.S dollar, Japanese yen, Chinese yuan and the euro.

But even though the strengthening real reduces some of Brazil’s export pricing advantage, the domestic economy is still growing, particularly in three sectors …

Sector #1—
Wireless Communication

With 207.5 million mobile subscribers and a penetration level of over 106 percent, it is easy to assume that the Brazilian wireless market is close to the point of saturation. Well, you might want to look a little deeper into the industry …

Brazil’s telecom market is largely dominated by foreign-owned companies keen to aggressively expand their operations in the world’s fifth most populous country.

So what is the attraction to the Brazilian wireless market? Brazil added 10.5 million 3G subscribers over the past 12 months. But immense growth potential still exists in that segment if you consider that 3G accounts for a mere 10.6 percent of the total mobile connections within the country.

As major global telecommunications players hunt for growth from the emerging markets, I feel that companies with an established presence in countries such as Brazil will be attractive acquisition candidates.

For example, recent M&A activity such as AT&T Inc.’s (T) $39 billion deal to acquire T-Mobile USA, and Vodafone Group PLC’s (VOD) $5 billion payment for a 33 percent stake in its joint venture with India-based Essar Group demonstrates that there is no shortage of deep pockets in the industry.

So, how can individual investors benefit from the investment opportunities in Brazil’s telecommunication market?

In my opinion, the best name in the business is Telefonica SA (TEF). This Spain-based operator owns 50 percent of Vivo Participacoes SA (VIV), which gives it a 30 percent share of the Brazilian wireless market. And it has boosted its investment plan for Brazil to $14.6 billion over the next four years.

Another idea is major domestic player, Brasil Telecom SA (BTM).

Sector #2—
Infrastructure

Brazil hosts the World Cup in 2014 and the Olympics in 2016, which will bring a heap of new economic opportunities. In the meantime the country will require upgrades in roads, bridges, hotels, public transportation and airports to handle the onslaught of visitors and additional traffic.

EGShares Brazil Infrastructure (BRXX), unlike many emerging markets ETFs, doesn’t focus exclusively on mega-cap stocks. About half of BRXX’s assets go to mid-cap securities, with about 35 percent in large caps. Utilities represent its largest holdings, and industrials and basic materials come in second and third.

Sector #3—
Consumer Goods

March auto sales in Brazil were up 12 percent over the February data.

Ultimately that may be good for funds like Global X Brazil Consumer ETF (BRAQ). This ETF includes two of my favorite stocks Brasil Foods SA (BRFS) at 6.1 percent of holdings and AmBev (ABV) another 5.3 percent of the portfolio.

Inflation Rates on
the Upswing

The twelve-month inflation rate in Latin America’s biggest economy jumped 6.08 percent through mid-February — well above the center of the government’s target range of 4.5 percent, plus or minus 2 percentage points. In a weekly central bank poll, economists also see inflation remaining brisk throughout 2011, closing the year at 5.79 percent.

But unlike our Fed that continues to stick its head in the sand, Brazil’s leaders are doing something about it …

Its central bank has raised the policy interest rate (SELIC) to 11.75 percent for the second time since January 19, 2011.

Brazil’s interest rates are nominally high. But interest rates do not have the same impact on Brazilians as they do in developed markets.

In fact, mortgage lending in Brazil is about a tenth of total credit (less than 5 percent of GDP) and there is no such thing as a collateralized debt obligation in the country.

My take on Brazil is this:

Brazilian GDP grew by 7.5 percent in 2010, the strongest economic performance since the 1980s. And while the forecasts for 2011 vary from 4 percent to 4.5 percent with the government figures being on the higher end, this is still one of the most dynamic emerging market economies.

Best wishes,

Rudy