"...I'd Bet on Brazil First..."
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a recent speech to a gathering of bankers in San Paulo, former president Bill Clinton stated that,"If I were just sitting in a room betting on the future of rising countries, I'd bet on Brazil first." Uber investors George Soros and Ray Dalio share the same bullish view on Brazil as an investment.
Ray Dalio is the head of Bridgewater Associates, the biggest hedge fund in the world with close to $80 billion in assets under management. Dalio is now the must successful hedge manager in history, earning a total of $35.8 billion in capital gains for investors compared to the $31.2 billion registered by Soros during his career. The biggest purchase for Dalio during the second quarter of 2012 was iShares MSCI Brazil Index (NYSEMKT: EWZ), the exchange traded fund Brazil. He bought 2 million shares at an average price of $56 each. Soros has also invested heavily in various Brazilian assets.
Like so many other countries around the world, Brazil is experiencing declining economic growth. But when investors like Dalio are going in, others should follow. A conservative way for long term investors to gain exposure to Brazil, in addition to an exchange traded fund for the country, is through solid companies such as Petroleo Brasileiro SA (NYSE: PBR), a major oil firm based in Rio de Janerio; Companhia Siderurgica Nacional (NYSE: SID), a steel and iron company; and Vale SA (NYSE: VALE), an industrial minerals and metals company. Due to the slump in Brazil, each of these stocks is trading well below its 52-week peak with a price-to-earnings ratio beneath the average of around 14 for a member of the Standard & Poor's 500 Index.
Enhancing the total return to be offered in comparison with other companies in the sector is the superior dividend yield. Vale SA provides a higher rate of dividend income to its shareholders than other members in its industry group such as BHP Billiton and Peabody Energy.
Companhia Sieurgica Nacional, too, offers far higher dividend income than other steel and iron companies such as Arcelor Mittal, the world's biggest, and Nucor Corporation.
On a price-to-book ratio, Petroleo Brasileiro SA is greatly undervalued compared to Big Oil competitors such as ExxonMobil (NYSE: XOM) and Chevron.
Enhancing the alluring price from selling cheap based on asset value is that Petroleo Brasilerior SA is also trading at a bargain level for its projected earnings ahead. As investors buy for the future revenues of a company, the forward price-to-earnings ratio for Petroleo Brasileiro SA is far more appealing than that for either ExxonMobil or Chevron. The forward price-to-earnings ratio for ExxonMobil is 10.79. For Chevron, it is 9.05. Petroleo Brasileiro SA has a forward price-to-earnings ratio of 7.07.
The economy of Brazil and the shares for companies such as Vale, Companhia Siderurgica Nacional and Petroleo Brasileiro SA have slumped due to the decline in global commodity prices. Much of that can be contributed to the falling economic growth in China. This is particularly significant for Brazil as the People's Republic is its largest trading partner. When economic growth to China picks up, so will the economy of Brazil.
There are many factors accounting for the bullish positions on the economic future of Brazil which led to the massive buy of the EWZ by Dalios and should attract other investors with a long term horizon.
As one analyst stated about this investment appeal in a recent piece, "“Brazil has huge foreign reserves relative to its GDP and a relatively high prime rate right now. So, its government still has high power in untapped monetary and fiscal measures to stimulate its economy. In addition, since the Rio Olympics is still four years to go and a large amount of construction projects have yet to be completed, Brazil’s economy and oil consumption will be further spurred by the Olympics games over the next three to four years. Don’t forget how much the Shanghai index rose over the four year period before the Beijing Olympics.”
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.