Cashing in on the World Cup and Olympics in Brazil

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

We’ve all heard the disappointing news coming from team BRIC: Brazil’s boom has slowed to a trickle with GDP growth in 2012 predicted to be just 1%. The lofty 3.1% figure previously touted by the Brazilian Central Bank turned out to be achievable, but only through some, err, inventive accounting. Brazil’s growth prospects remain uncertain, but one thing is for sure: the upcoming World Cup and Olympics Games are going to be huge drivers of infrastructure spending. This presents several significant investment opportunities. Before discussing them, let’s first take a closer look at the country’s economic climate.  

Even with Brazilian Bank Itaú predicting a 1.5% boost in GDP from the World Cup alone, there is good reason to proceed with caution if you’re looking to increase your exposure to the Brazilian market in the near future. The credit-driven consumption that drove Brazil’s growth in the past decade is now slowing. Even with state-owned banks offering low interest rates, households are becoming more and more unwilling to borrow. Twenty-three percent of disposable income is now tied up servicing existing debt from purchases of things like cars, televisions, and home appliances. This is cause for concern, especially in a country where an estimated 80% of GDP is tied to consumption. That said, nearly 165 million potential consumers in the country are predicted to spend between $3 billion and $6 billion by the end of 2013.

Another source of worry is China. Brazilian commodity exports, mostly heading for China, more than doubled since 2005 and now account for 14% of GDP. But with Chinese growth rates and global commodity prices beginning to fall, Brazil’s medium and long term growth prospects are put in jeopardy.

Opportunity

Over the next four years, the government plans to spend R$955 billion (around US$470 billion) on 12,265 projects to improve roads, railroads, seaports, airports, stadiums as well as the country’s energy generation and distribution systems. 

The important thing to realize is just how desperately Brazil’s infrastructure needs every penny.

The country that is about to host the two largest mega-events in the world is a country where 14% of roads are paved (most of them in São Paulo). It’s a country who’s infrastructure ranked 104th out of 142 countries in a World Economic Forum survey. The huge need for timely infrastructure improvements coupled with the anticipated government expenditure translates into a significant opportunity for investors. 

The first thing to do is take a close look at the EGShares Brazil Infrastructure ETF (NYSEMKT: BRXX), which is comprised of 30 leading companies that represent Brazil's infrastructure sectors. The Top 10 holdings and weightings are

  1. Ultrapar Holdings Inc (UGPA3): 6.31%
  2. Basic Sanitation Company of the State of Sao Paulo (SBSP3): 5.83%
  3. CCR SA (CCRO3): 5.76%
  4. Embraer S.A. (EMBR3): 5.54%
  5. CESP - Cia Energetica de Sao Paulo Pfd Shs -B- (CESP6): 5.25%
  6. CPFL Energy SA (CPFE3): 5.09%
  7. BR Malls Participacoes S.A. (BRML3): 4.95%
  8. Tractebel Energia S.A. (TBLE3): 4.86%
  9. Gerdau SA (GGBR3): 4.64%
  10. Weg SA (WEGE3): 4.05%

Buying this ETF is a nice strategic play. It’s cheap relative to iShares MSCI Brazil Index - the more talked about Brazilian ETF - and yields over a full percentage point more (3.78% versus 2.52%). And by gaining broad exposure to utilities (27.19%), industrials (19.48%), basic materials (14.37%), real estate (11.32%), consumer cyclicals (6.51%), energy (5.38%), and communication services (4.49%), you’re well positioned to reap the benefits of Brazil’s infrastructure spending binge.

Other Plays

AECOM (NYSE: ACM)

This global architectural giant was awarded the contract to design the master plan of the Rio 2016 Olympic Park. If the name sounds familiar, it may be because they were given the same job for the 2012 London Olympics, or possibly because they hold a host of multi-million dollar planning and construction contracts around the globe. AECOM is the best at what they do (they beat out over 100 other firms for the Rio contract) but their task is daunting: transform an infrastructure nightmare into a well oiled machine before 2 million or so expected tourists descend on Rio in 2016. 

Caterpillar (NYSE: CAT)

Two years ago the company invested $180 million to set up a production facility in the city of Campo Largo and expand an existing facility in Piracicaba. They’re well positioned to take advantage of the construction boom in the coming years. But for Caterpillar, that’s not the full story. With the discovery of pré-sal reserves that could contain as much as 100 billion barrels of oil, the marine and petroleum offshore markets are primed for sustained growth and Caterpillar is already cashing in: they recently secured a contract to power 16 offshore supply vessels. 

Anheuser-Busch InBev (NYSE: BUD)

After pressure from FIFA, Brazilian president Dilma Rousseff announced the government will temporarily suspend a law banning the consumption and sale of beer inside stadiums for the duration of the Cup. As a FIFA World Cup Sponsor with exclusive “pouring rights” inside all stadiums during the 2014 World Cup, AB-Inbev stands to benefit substantially from the decision. Ambev, the company’s Brazilian subsidiary, is the biggest brewery in Latin America. Its brand portfolio includes beers like Antarctica, Brahma, Bohemia, Skol, Stella Artois and soft drinks like Guaraná Antarctica. 

The Bottom Line

Brazil is scrambling to improve its shoddy infrastructure and is spending tremendous amounts of cash to do so. Its mid to long term growth prospects are uncertain, but the economic sectors that will drive the construction boom represent lucrative investment opportunities.


GarrickSheldon has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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