Loading ...Article - Brazil Best Place to Invest Among BRICs
Oct. 30 (Bloomberg) - Brazil is the best place to invest among the larger emerging markets because of rising demand for commodities while the U.S. should be avoided because of the prospect of a “double-dip” recession, said John Mauldin, president of Millennium Wave Advisors LLC.
Domestic demand in Latin America’s largest economy and faster economic growth in emerging markets, especially the BRIC nations that include Russia, India and China, will push up commodity prices, Mauldin said in an interview in Sao Paulo. Millennium Wave, based in Arlington, Texas, advises hedge funds.
“Of the BRICs, Brazil has the most interesting story today,” he said. “The U.S. is going to have a second recession because of tremendous tax increases. When the U.S. drops because of recession will the rest of markets drop? Probably. That’s why people need to be hedging their bets.”
Investors should begin shifting out of equities and into areas that take advantage of continued demand for raw materials including agricultural products before the U.S. slips into a recession by 2011, said Mauldin, whose weekly newsletter is distributed to about 1.5 million subscribers.
Commodities have displaced stocks as the investment that will offer the best opportunity for profit during the next year, according to a global poll of Bloomberg terminal users. The Reuters/Jefferies CRB Index of 19 raw materials has gained 20 percent this year as the economy recovered from the first global recession since World War II.
Brazil is the world’s biggest producer of sugar, coffee and orange juice, the second-largest producer of soybeans and the third-biggest producer of corn. It’s also home to Vale SA, the world’s biggest iron-ore producer.
Real Estate
Brazil’s currency and real estate, especially agricultural land, are more attractive investments than stocks after the Bovespa index’s 79 percent gain this year, Mauldin said.
“If I were rich and a long-term investor I’d buy farmland in Brazil,” he said. “Eventually you’re going to get a railroad there and a cheap farm will become expensive because you can get your soybeans or whatever it is to market. There’s not going to be less demand for agricultural products in the future.”
Along with natural resources, advantages in producing soft commodities such as soybeans, a large labor force and a “dynamic” population with a large entrepreneurial class, Brazil will see economic growth in the next years that developed countries “would love to have,” Mauldin said.
Brazil will likely grow 4.8 percent in 2010 after expanding 0.18 percent this year, according to the weekly central bank survey of about 100 economists. The country’s currency, the real, has gained 34 percent this year against the dollar, the most among the 16-most traded currencies.
Excess Spending
Economic growth may be hampered by a widening government deficit and spending on payrolls rather than infrastructure investment, Gabriel Goulart, economist at Mercatto Gestao de Recursos in Rio de Janeiro, said in a phone interview.
Brazil’s budget deficit widened more than expected in September to a nine-month high as the government carried out its stimulus plan amid falling revenue. The deficit widened to 22.4 billion reais ($13 billion), the central bank said in a report today. Analysts expected a gap of 12 billion reais.
“The question isn’t just that of an excess of spending, but the nature of the spending, which is increasingly on government jobs,” Goulart said. “The government is running up bills that we’re going to have to pay in the future with non- reversible pay increases instead of investing in infrastructure, which is a serious problem.”
BRIC Earnings
Brazil is still more attractive than its BRIC peers, Mauldin said. China’s government has “wasted” a lot of money on inefficient investments and been rewarded by investors, he said. India’s bureaucracy slows growth, while Russia does not have a strong rule of law, he said.
Brazilian stocks are trading at a lower price relative to estimated earnings than India and China. The benchmark Bovespa index trades for about 15.8 times estimated profit, compared with 18.5 times for India and 22 times for China. Russia trades at 12.6 times estimated profit, according to Bloomberg data.
A 2 percent tax on foreign investors’ purchases of equity and fixed-income assets imposed Oct. 20 likely won’t derail flows from long-term investors and is a sign of how attractive Brazil’s market is, Mauldin said.
Investors have added $21.1 billion to Brazil investments through Oct. 23, according to the central bank. In equity markets, overseas investors have added 20 billion reais in stock holdings though Sao Paulo’s exchange and another 13.7 billion reais in public offerings, according to exchange owner BM&FBovespa SA.
Petrobras
“You don’t get a bubble without positive underlying fundamentals,” Mauldin said. “Look at what the government just did: they imposed a tax to try to keep people from investing because they’re worried about it becoming too much. What Brazil doesn’t want is short-term volatile money that can come and go. No market wants that.”
Mauldin also sees attractive returns in financing state- controlled Petroleo Brasileiro SA’s offshore oil exploration.
“It’s a lot of oil and potentially a very very profitable find; and over the next 10 to 20 years, oil prices are going to go up,” he said. “A lot of money will see it as a good investment.”
Source: Bloomberg.
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