by Jeff Reeves | May 27, 2010 12:09 pm
Every investor knows that an investment in emerging markets is crucial to a balanced stock portfolio. But while China and India spring to mind, don’t sell Brazil short. Among BRIC funds, this Latin American nation offers great investment opportunities.
Many traders don’t think it makes sense that this BRIC investment would be the best bet for their stock portfolio. After all, India is the world’s largest democracy and the second-most populous nation. And among BRIC funds, China is even bigger with the largest population, the fourth-largest geography and the world’s third-largest economy.
Brazil is about two-thirds the size of the U.S. population-wise, lagging behind China and India. The nation is also smaller geographically than the U.S., and about half the size Russia.
So what’s the appeal of Brazil investments?
There’s a lot of talk about a “China Bubble,” since the Chinese are misallocating capital on a massive scale. The interest rate in China has been far below the economic growth rate, resulting in a runaway real estate market for over 20 years. China is also risky since it is pegging its currency to the U.S. dollar due to an emerging market economy that is highly reliant on exports.
And let’s not forget there is growing concern regarding China’s protectionist policies and fears of a U.S. trade war. After all, China favors state-owned enterprises in the country. This doesn’t just mean private-sector companies from foreign nations don’t get a leg up – it means that BRIC investments in China may be in a company run by Beijing instead of businessmen.
Because of its democratic government, India offers more long-term promise than China. However, long-term profits don’t equate to success anytime soon. Among BRIC investments, India is the poorest nation and its infrastructure is a serious problem. Until this changes, India stocks will likely lag behind other BRIC funds.
While Russia hold promise since it is a huge nation with vast natural resources, this emerging market has been volatile due to currency problems and inflation worries in global markets. There is clearly potential in Russia, but the lack of economic diversification and stability makes it a difficult short-term bet.
Given the risks in other emerging markets, Brazil offers the most compelling opportunity for BRIC investment. Brazil businesses do not have to kowtow to the state, its economy is diversified with rich natural resources – and the country enjoys a lack of dependence on exports of consumer goods. It is competitive in manufactured goods and is seeing a booming middle class, so sales inside this BRIC investment zone offset sales of resources abroad.
Taken together, you can see why this is your best BRIC investment. Brazil is the only nation in this four-country group that is a stable democracy. Brazil does not engage in a mercantilist exchange-rate policy to boost exports. The country has universal state-funded education, health care, and pensions. Brazil also has 958 million acres of highly productive arable land, with 222 million acres that have yet to be farmed. Brazil generates 73% of its energy needs from hydroelectric power, and it is home to one of the top-10 largest oil reserves in the world, the Tupi field.
So how do you cash in on this BRIC investment boom in Brazil? There are plenty of blue chip stocks worth a look, including Petroleo Brasileiro (PBR) or Petrobras, Brazilian grocery and retail store Companhia Brasileira de Distribuicao (CBD), Brazil steel giant Gerdau (GGB), Latin American beverage giant Companhia de Bebidas das Americas (ABV) or AmBev for short, Brazil energy stock Ultrapar Participacoes (UGP), and telecom stock Vivo Participacoes (VIV).
Another way to play this BRIC investment market is to invest in Brazil funds – notably the Market Vectors Brazil Small-Cap (BRF) ETF or the iShares MSCI Brazil (EWZ) ETF. There are also Brazil mutual funds, including the Dreyfus Brazil Equity Fund (DBZAX) or regional funds in South America including Brazil and its neighbors such as the Fidelity Latin America Fund (FLATX).
As of this writing, Jeff Reeves did not own positions in any of the companies named here.
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