Brazil's Future Looks Promising

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors are always looking for the next big idea.  Although the U.S. recently avoided a fiscal cliff, there are still a lot of challenges ahead.  In light of those challenges, investors may want to consider an emerging market that appears poised for a bright future.  That market is Brazil.

Although Brazil has had its struggles of late, there are many reasons that investors should still be optimistic about the future.  The biggest reason may be the benefits that a couple of future events will provide.  The country will play host to both the 2014 World Cup and the 2016 Summer Olympics.  Both of these events should generate strong revenue and in preparation for the events, a strong improvement in infrastructure.  Based on recent estimates, Brazil can expect to generate $3.5 billion from the World Cup and $5 billion from the Olympics.  Additionally, the events should open up future opportunities to derive additional revenue from future tourists.  As if that wasn't enough, Brazil will need to drastically improve its infrastructure in preparation for the events.  Although it will be costly at first, it should pay strong dividends in the future.

Another reason to be positive about Brazil is consumer confidence.  During the last 10 years, more than 40 million Brazilians have been able to escape poverty and enter the middle class.  This transformation should increase demand for many goods and services and help drive Brazil from an emerging market into a developed one.  One doesn't need to look outside the United States to understand what a growing and confident middle class can do for an economy.

Brazil has one of the youngest median population ages in the world.  Its median age is currently just 28.9 years.  Compared to the U.S. (36.9 years) and Japan (44.6 years), one can quickly realize why so many are confident about Brazil.  One of the benefits of a younger population is that more people are working to grow the economy without the challenges that face an older society such as how to provide affordable living and healthcare to the elderly.

And lastly consider the growth of Brazil's manufacturing industry.  During the third and fourth quarter of 2012, Brazil's manufacturing growth has been 1.1%, the highest rate since early 2010. 

So how can an investor take advantage of the Brazilian future?  Well the best way is through exchange trade funds, commonly known as ETFs.  These investment vehicles invest in a diversified set of equities which gives the investor less risk and exposure to a wide variety of sectors and businesses.  The most common Brazilian ETF is the iShares MSCI Brazil Index (NYSEMKT: EWZ).  EWZ invests in a variety of sectors including financials, energy, and healthcare.  The fund's top holdings are Vale S.A. (NYSE: VALE) and Petroleo Brasileiro (NYSE: PBR).  Both companies are involved in Brazil's energy market so if you believe in the future of natural resources, this might be a vehicle for you to consider.  Vale currently trades at just under $21 per share giving the company a market capitalization of $108 billion.  It has a price to book ratio of 1.3 and average return on equity of 16%.  Petrobras currently trades at just under $20 per share giving the company a market capitalization of $127 billion.  It has a price to book ratio of 0.8 and an average return on equity of 7%.

While all of the above is promising, investors need to keep in mind the risks.  Currently, it is quite easy for workers to find jobs in Brazil.  The company has a historically low unemployment rate of 5.3%.  The consequence of this is that businesses are forced to pay higher wages to retain top talent.  Additionally, businesses are having trouble keeping up with the economic growth of the country.  Lastly, Brazil is a domestically focused economy rather than global, because of high tariff costs and very few international trade agreements.

So while the benefits certainly outweigh the negatives, investors need to understand that Brazil is still an emerging market and proper portfolio diversification needs to be used. 

ET1980 has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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