Your Investments: Brazil more than just global soccer power

With the seventh-largest economy, investors looking for long term potential growth investments may want to take hard look at Brazil.

By AARON KATSMAN
August 24, 2011 22:46
4 minute read.
President Shimon Peres and Carlos Arthur Nuzman

Peres Brazil olympics 311. (photo credit: Genie Agency)

 
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If I were to ask you to name a very populous country with strong economic growth and a growing middle class, chances are you would answer China or India. While China and India are correct answers, there is another country that also fits the criteria, and that is Brazil.

Now when we think of Brazil we think of a global soccer (football) power, the party atmosphere of Rio de Janeiro and the Amazon. We may also think of crime and poverty. What doesn’t usually pop to mind is that Brazil is quickly emerging as a global economic power.

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With the seventh-largest economy and growing quickly, investors looking for long term potential growth investments in international markets may want to take a hard look at Brazil. In addition, the upcoming World Cup and Olympics to be hosted by Brazil in the next five years may prove to be a catalyst for the market.

In many instances an upcoming event of such magnitude has proved to be the engine for stock-market appreciation. Obviously just because it happened in the past is no indication that it will happen this time around, but it’s something to keep an eye on.

I recently had the fortune to interview Seth Zalkin, cofounder and managing partner at Astor Group, a global investmentbanking advisory firm that does a lot of work in Brazil. Zalkin is an expert in the Brazilian economy and really gives a thorough look at the market. Here are some excerpts from the interview:

Can you give an overall picture of the Brazilian economy?

Zalkin: Notwithstanding concerns about inflation, Brazil’s fundamentals and its long-term outlook both remain strong. The job market is growing, and that is supporting a significant transition from a lowwage country to a country with a voracious middle class.



Over the next 18 months, growth should stay strong and the actual GDP should remain above potential output at somewhere around 4.0 percent this year and slightly higher in 2012. Although the Bovespa has the potential to outperform developed exchanges over the long term, the broad-based uptrend experienced in the last couple of years is unlikely to return.

While Brazil faces a number of fiscal challenges, and its infrastructure demands urgent attention, the country is like a winding mountain road: danger exists around every corner, but with a stable political climate it is slowly getting to its long-awaited destination.

How are inflation worries playing into the story?

Zalkin: Brazil’s persistent inflation concerns continued in July as the 12-month inflation rate reached its highest level in six years. But concerns about global economic growth and expectations for a retreat in prices later this year will prevent the central bank from raising interest rates when it next meets on August 31 as it had recently been expected to do.

While Brazil’s central bank targets inflation of 4.5%, plus or minus two percentage points, consumer prices rose 6.9% in the 12 months through July, the fastest pace since 2005. Inflation is expected to peak and then start to trend down by the end of the year.

While interest-rate hikes and other measures implemented earlier this year may not be enough to bring inflation down to its target in the next year, the stumbling global economy may provide a helping hand. A decrease in the commodity market, lower fuel prices and weakening global demand are all likely to relieve inflationary pressure and even give room for policy makers to cut interest rates if the economy continues to decelerate.

If inflation resists these external factors and continues to spiral out of control, the government will be forced to raise interest rates yet again and risk choking off any significant economic growth.

How do you think the Olympics and World cup will impact the economy?

Zalkin: The World Cup and Olympics will bring significant economic and structural benefits to Brazil and will also advance the country’s planning and infrastructure network. Increased investment in airports, the power grid, railways, roads and other transportation, hotels, telecommunications and environmental projects will all have a long-term impact on the Brazil economy that will transcend the direct impact of the actual events.

While this is a very brief synopsis of the Brazilian economy, investors looking for potential growth markets may want to research the Brazilian market. Then speak with your financial adviser to see if an investment in Brazil fits into your long-term asset allocation and risk profile.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.

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