The Olympics are Coming to Brazil - Why Now is the Time to Buy

By Simon Erickson - August 10, 2012 | Tickers: BRXX, CIG, GGB | 0 Comments

• Email
• Print

The Olympic Games are no doubt one of the most exciting events to watch in the world. 

• Michael Phelps won his 19^th Olympic medal, making him the most decorated Olympian of all time.  Will this really be his last Olympics?  Only time (and his mother) will tell.
• Usain Bolt won his 2^nd consecutive gold medal in the 100m dash, showing that he is still the fastest man in the world.  Finishing in 9.63 seconds, his average speed was 23.4 MPH.  I know people who can't drive a car that fast (I normally get stuck behind them on the highway).
• An estimated global audience of 4 billion people watched the Olympic opening ceremony on July 27th.  It included David Beckham bringing in the torch on a speedboat, Paul McCartney playing Hey Jude, and (of course) the queen making her entry into the stadium via parachute.  She even did it all without having to crack a smile.

Though all of the hype around the Olympics was great for London, it didn’t come without a cost.  The city has been pumping money hand over fist into its infrastructure in preparation of the games.  London originally intended to spend $4 billion on the 2012 Olympics, though the final cost is estimated to be closer to $19 billion.

And the costs for the Olympics are notorious for overrunning their budgets.  Take a look at the variance between original and final cost estimates for the four Olympics of this millenium: 

Sources:  1 - Guardian UK; 2 - Wordpress.com; 3 - Sky Investigation; 4 - Washington Times;       5 - Sport Business

The 2016 Olympic Destination:  Rio de Janeiro

The next Olympics will be held in Rio de Janeiro in 2016, and you’d better believe that there’s going to be a boatload of infrastructure spending there as well.  Rio is planning to hold all the competitions inside the city, at a total estimated cost of $14.4 billion.  If history is any indicator of the future, that estimate will also be low.

Not surprisingly, some of the largest investments the city makes for the Olympics are in training and performance centers for the athletes.  The following are the top five new competitive venues that Rio is planning to build and their estimated costs:

Source:  Wikipedia

Rio de Janeiro also got a report card from the International Olympic Committee that graded several aspects of the city’s preparedness to host the games.  Some of Rio’s lowest marks came in “General Infrastructure” and “Accommodation” – which were two of the highest-weighted sub-criteria on their list.

Though it somewhat baffles me that Rio was chosen, even after getting flunking grades in some of the most important classes, it is clear that the country will need to commit a vast amount of resources to build out its infrastructure.  In addition to the Olympic stadiums, this includes improvements to the city's roads, mass transit system, and accommodations.

Investment Opportunities

Now let's put the Motley Fool spin on this story.  How can we make money on this as investors?

First, know that investing internationally is a completely different game than investing in the US.  There are a lot more risks that can burn you if you don't dig in deep (pun somewhat intended..after all, we are talking about infrastructure here) and do your homework. 

That said, there are some big opportunities for investors willing to do research in this space.  I ran a search for Brazilian infrastructure companies that were publicly-traded on US exchanges, and the following two initially caught my eye:

"CEMIG" (NYSE: CIG) is the largest independent provider of electric power generation, transmission, and distribution in Brazil.  They have experienced huge spikes, both up and down, in their revenue growth over the past few years.  Still, the company's stock is up 38% YTD and currently pays a 5.2% dividend .  Gardau (NYSE: GGB) is a Brazilian steel producer that operates mini-mills that use scrap metal as input.  If Brazil chooses to source steel locally (a seemingly logical assumption) there could be a huge opportunity for them in the coming years.

A less-risky way to play the trend is through buying a basket of companies through an Exchange Traded Fund (ETF).  Emerging Global Advisors offers a Brazil Infrastructure ETF (NYSEMKT: BRXX) that seeks to replicate the performance of the INDXX Brazil Infrastructure Index. There are 30 companies in the fund, deemed to be representative of Brazil’s infrastructure sector.  The top five holdings 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%

The Macro Trend Supports the Thesis

The Olympic games will no-doubt contribute to aggressive expansion plans in Rio de Janeiro in the coming years.  Rio is also hosting the FIFA World Cup in 2014, which had 112 million US viewers in 2010.  If the Olympics and the World Cup weren't already enough, there are also several macro indicators that suggest that Brazil might begin pumping money into its economy in the form of fiscal stimulus. 

Surging growth in China over the past decade had boosted Brazil’s exports, which are its prime contributor to GDP.  To compensate, the country had to tighten its monetary policy (i.e. bank lending rates) to constrain inflation in the country and slow down the raging growth.

However, slowing growth in both China and the US have reduced the demand for Brazilian exports.  Brazil’s GDP is now growing much more slowly than other countries in South America.  Their currency is deflating, and inflation in the country has now become stagnant.  Anemic GDP growth and inflation near zero are recipes for disaster, which leads many macro-economists to believe that the country is soon to step in with fiscal stimulus.

Foolish Bottom Line

The 2014 World Cup, 2016 Olympics, and leading macro indicators all support the idea that Brazil is about to get serious about tricking out its infrastructure.  Do your research before investing any money, but the big picture suggests that the bulldozers are on their way.

• Email
• Print
• Feedback