Brazil for the Buy-and-Hold Investor

By Calla Hummel - July 6, 2012 | Tickers: ABV, VALE, PBR | 0 Comments

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Investors rushed into Brazil enmasse in 2009 in hopes that the country would sustain its emerging market poster child status. However, many of those investors have pulled their money out in recent months: May alone saw $6.3 billion leave Brazilian stocks and bonds. Are those of us interested in holding on to our Brazilian investments being foolhardy? 

Investing in Brazil is Still Risky

By now, it’s clear that while Brazil has a healthy macroeconomic outlook and an impressive domestic market, it’s not the runaway growth story that many investors hoped for. The country has low unemployment, low inflation and has posted positive if unimpressive growth through a choppy international environment. However, good economic news has only been coming out of Brazil for less than a decade, and its long-term track record includes over a decade of runaway inflation in the 1980s and 1990s, as well as cyclical commodity booms and busts. While recent trends in macroeconomic health – including no foreign debt and huge international reserves – are quite reassuring for the medium term, there is no guarantee that the trends will continue in the long term.

Slowing Credit

As the Wall Street Journal reported last week, Brazil does not have a credit bubble but consumer spending based on credit expansion is slowing. Thus, investors looking to profit off Brazil’s domestic market should look to consumer staples, cheap fun, and other products that don’t make shoppers go for their credit cards. In particular, beverage producer AmBev (NYSE: ABV), while still at a high valuation of P/E 27.4, produces 7 out of every 10 beers in Brazil and stands to profit from not only the 2014 World Cup and the 2016 Olympics, but also from Brazilians’ well-established track record of throwing good parties in every economic environment. On the back of domestic market growth, AmBev is now Brazil’s second-largest company.

Commodity Cycles

Brazil has been a commodity exporter for 500 years and Brazilian universities still teach economic history as a series of commodity booms and busts. Thus, it’s unsurprising that the biggest Brazilian company is the oil and natural gas company Petrobras (NYSE: PBR) and iron ore producer Vale (NYSE: VALE) ranks third. Vale is currently trading at a dirt cheap valuation due largely to concerns about the global market; when the economy picks up again, so will the stock price. Petrobras has plummeted from a perfect storm of falling gas prices, less than ideal government policy, a slowing domestic market, rising debt dollar-denominated payments, and downward guidance revisions. Worryingly, the stock price fell over 10% last week when the company announced that its ambitious investment plan would cost more and produce less. Petrobras made itself a more speculative investment with last week’s announcement, but Brazilians will keep buying gas and the company’s huge deep water reserves are tantalizing.

Cautious Optimism

With a rising middle class, increasingly educated workforce and macroeconomic health trend, I am cautiously optimistic that Brazil will continue to be a stable, but not spectacular, emerging market. The country will continue to be a commodity exporter and benefit when global prices are high. Additionally, the growing middle class can help diversify the sectors represented in the country’s largest companies, and cautiously optimistic buy-and-hold investors can profit from that trend.

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