Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
9.WE HAVE NO CHOICE BUT TO INVEST IN STOCKS AND HOUSING MARKET - Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
The Inflation Mega-trend and UK House Prices - Housing Market Analysis Trend Forecast 2022 to 2025 - 5th July 22
Gold Price Summer Seasonal Doldrums - 5th July 22
Tame Budgies Having Fun on a Grape Vine - UK Parakeet Easy Training - 5th July 22
Is the US Yield Curve Inversion Broken? - 3rd July 22
New Signs Economic Turmoil Will Prompt Fed to Lose Its Nerve - 3rd July 22
Stagflation With Powell Could Make Gold Price Happy - 3rd July 22
UK Housing Market Analysis, Trend Forecast 2022 to 2025 - Part 2 - 30th June 22
Stock Market Turning the Screws - 30th June 22
How to Ignore Stocks (and why you should) - 30th June 22
Top Tips For Getting The Correct Insurance Option For Your Needs - 30th June 22
Central Banks Plan To Buy More Gold In 2022 - 30th June 22
AI Tech Stock PORTFOLIO NAME OF THE GAME - 29th June 22
Rebounding Crude Oil Gets Far Away from the Bearish Side - 29th June 22
UK House Prices - Lets Get Jiggy With UK INTEREST RATES - 28th June 22
GOLD STOCKS ARE WORSE THAN GOLD - 28th June 22
This “Bizarre” Chart is Wrecking the Stock Market - 28th June 22
Recession Question Answered - 28th June 22
Technical Analysis: Why You Should Expect a Popularity Surge - 28th June 22
Have US Bonds Bottomed? - 27th June 22
Gold Junior Miners: A Bearish Push Is Coming to Move Them Lower - 27th June 22
Stock Market Watching Out - 27th June 22
The NEXT BIG EMPIRE WILL BE..... CANZUK - 25th June 22
Who (or What) Is Really in Charge of Bitcoin's Price Swings? - 25th June 22
Crude Oil Price Forecast - Trend Breaks Downward – Rejecting The $120 Level - 25th June 22
Everyone and their Grandma is Expecting a Big Stocks Bear Market Rally - 23rd June 22
The Fed’s Hawkish Bite Left Its Mark on the S&P 500 Stocks - 23rd June 22
No Dodging the Stock Market Bullet - 23rd June 22
How To Set Up A Business To Better Manage In The Free Market - 23rd June 22
Why Are Precious Metals Considered A Good Investment? Find Out Here - 23rd June 22
UK House Prices and the Inflation Mega-trend - 22nd June 22
Sportsbook Betting Reviews: How to Choose a Sportsbook- 22nd June 22
Looking to buy Cannabis Stocks? - 22nd June 22
UK House Prices Momentum Forecast - 21st June 22
The Fed is Incompetent - Beware the Dancing Market Puppet - 21st June 22
US Economy Headed for a Hard Landing - 21st June 22
How to Invest in EU - New Opportunities Uncovered - 21st June 22
How To Protect Your Assets During Inflation - 21st June 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Brazil, The Market Investors Cannot Afford to Miss

Companies / Brazil Mar 05, 2010 - 05:27 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleMartin Hutchinson writes: In many ways, Brazil offers some of the best prospects among emerging markets and deserves to be a core holding in any international portfolio.

Brazil's economy had only a shallow recession and is now recovering nicely. Its market has been one of the best performing since Dec. 31, 2008, and both inflation and the budget deficit remain under control.


Yet one can be only moderately bullish - and I'll explain why.

If you rely on the numbers, Brazil appears to be in fine shape. Its gross domestic product (GDP) declined by just 0.3% in 2009, and is expected to rise by 5.8% in 2010. Its balance of payments deficit is less than 2% of GDP and its budget deficit, at less than 4% of GDP, is very moderate. Inflation is also moderate at 4.6%, and short-term interest rates at 8.5% are high enough to keep the inflation under control.

What's more Brazil is about to start benefiting from a gigantic oil find, the huge new Tupi oil fields, where oil was confirmed in 2007. These are located below heavy salt beds in deep offshore water, up to 7,000 meters down, much further than had been possible to drill until recently. These enormous discoveries appear to contain at least 60 billion barrels of oil, worth $4 trillion at today's prices. They are expected to come on stream starting in 2012 and will revolutionize Brazil's economy and its balance of payments.

While Brazil's stock market has zoomed up in the last year, it is currently selling at only 16.6 times earnings, well below its counterparts in both India and China and a reasonable valuation, given the growth prospects.

Unfortunately, there's an election late this year. While incumbent President Luis Inacio "Lula" da Silva can't run again, he wants to pass his power on to his party's nominee -former Chief Minister Dilma Rousseff. Rousseff was put in charge of devising a scheme to capture more of the Tupi oil revenue for the Brazilian government and, nominally, the Brazilian people.

A new state oil company, Petrosal, will be created to manage the new reserves.  Petroleo de Brasileiro SA (NYSE ADR: PBR), also known as Petrobras, will carry out production, with outside investors helping to supply the capital. Output will be shared between the investors and Petrosal. Petrosal will have half the votes on the operating consortium and veto rights over production and capital expenditures.  A new state fund will be set up to manage the revenue, which will be devoted to poverty relief, education and infrastructure.

Meanwhile, the current royalty system would remain, so that outside investors would pay both royalties and a production share. As one concession to reality, the concessions already granted would not be torn up.

There are two major problems with this system. First, it makes life much more difficult and less profitable for oil companies wanting to invest in the Tupi fields. Second, the oil revenue fund will be a huge pool of money for politicians to play with. Brazilian public spending is already 35% of GDP - a very high rate for such a poor country.

State bureaucrats have featherbedded contracts guaranteed to them under the 1988 constitution. So this slush fund will just fuel Brazilian corruption and divert yet more of the economy into the pockets of politicians, and to their friends and favored interest groups.

That makes Brazil dangerous from a long-term vantage point. If the state petroleum fund allows the already-outsized government to expand, Brazil will slip back to its 20th century state of forever being the "country of the future."

On the other hand, the petroleum fund could do enormous good if it is mostly channeled into tax cuts so that the state accounts for a smaller part of larger economy.

Six Ways to Play Brazil

We will know much more about Brazil's long-term prospects after the election, due in two rounds in October. In the meantime, rapid growth in China and India and expansive monetary policy in most of the developed world are causing a prolonged commodities boom, which can only be good for Brazil's economy.

So at least part of your international money should be invested here, despite the stated risks.

Brazil's prospects are simply too good to miss, even with the doubts attached. Here are what I believe to be the six best ways to capitalize on Brazil's promise, and the global trends that are feeding it:

  • The iShares MSCI Brazil Index (NYSE: EWZ) exchange-traded fund (ETF) is more than $9 billion in size, and is currently trading at a Price/Earnings (P/E) ratio of about 14. It has a dividend yield of 4%.
  • Fibria Celulose SA (NYSE ADR: FBR) is the result of a 2009 merger between Aracruz and Votorantim Celulose e Papel (VCP), a pulp-and-paper manufacture with capacity of 6 million tons of pulp. Pulp is one of the commodities not enjoying bull-market conditions right now, but the stock yields about 5% and has a prospective P/E of 20.
  • Itau Unibanco Banco Holding SA (NYSE ADR: ITUB) resulted from the merger of two large banks, Itau and Unibanco, and is now the largest bank in Brazil. It has a P/E ratio of 16 and dividend yield of 0.4%.  It's highly rated, but it deserves to be. The prospects for ITUB are considerably better than for U.S. banks, because Brazil's interest rates have dropped in the past year but are still well above inflation. That means lending can be expanded on a sound basis.
  • Petroleo de Brasileiro SA (NYSE ADR: PBR), or Petrobras, is one of the few emerging-market oil companies with access to modern technology and a willingness to work with Western oil majors. Trading at about 12.5 times 2009 earnings, with a 2.8% yield, there would appear to be room for some upside, given its long-term prospects.
  • Companhia de Saneamento Basico (NYSE ADR: SBS), or Sabesp, is a water-and-sewage system provider for Sao Paulo. Now that's a growth business, and is one that's not dependent on commodity prices or rapid Brazilian economic growth. It has a P/E ratio of just 5.5 and yields 5%. It looks like a bargain to me; it has growth almost built-in.
  • Vale SA (NYSE ADR: VALE) is one of the new world blue chips, with a market capitalization of almost $144 billion. It's the world's largest producer of iron ore and it has ancillary operations in gold, nickel, copper and other metals. Vale should benefit from Chinese iron ore re-pricing this month (the price in the Chinese market gets re-set annually, and was very low in 2009-10.) However, it may be a little rich at these levels. It is trading at 16 times projected 2010 earnings, with a 1.9% yield.

Soure: http://moneymorning.com/2010/03/05/brazils-economy/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

mary
14 Apr 10, 13:31
Pre-Salt Discoveries - Brazil

Pre-salt Oil Discoveries in Brazil: What now?

This event marked an important moment for the Brazilian oil industry, because recent discoveries in the world oil scene have been rare and also because Brazil has always carried the title of eternal latecomer in the race for oil. The Brazilian oil industry was, until then, a classic case of sudden success but with limited potential.

For free access to full content visit:

http://www.alternativelatininvestor.com/24/commodities/pre-salt-what-now.html


Post Comment

Only logged in users are allowed to post comments. Register/ Log in