Monday, May 26, 2008

Brazil: As Terry Gilliam Didn't See It

Why Legendary Investors Are Buying Up Brazil

Oh how the tables have turned for Brazil. Why, back in the 1980s Brazil was defaulting on its debt and Brazil’s currency, the real was the laughing stock of the whole currency market. For currency investors, the real was as speculative as a penny-stock. Roll the hands of time forward to today and it’s a whole new story. Savvy investors like Warren Buffet are holding the Brazilian real. Why in the world would he hold a currency from a country like this? Well it’s no secret that natural resources have been enjoying a bull-market for a while now and according to Jim Rogers we’ve still got a long way to go in this commodity boom.
Hate These Sky-High Food Prices? You Wouldn't If You Owned Brazil!
Brazil is a commodity rich nation. The largest South American country is also the world's largest producer of iron ore, coffee, and sugar (in fact, while the entire world struggles to pay for US$127 oil, Brazil has managed to cut their energy costs by mass producing sugar-based ethanol). Brazil is also a major exporter of soybeans, pork and beef. So as commodity prices continue to rise all over the world, Brazil is literally cleaning up. Honestly, this is fairly typical. Whenever any shock hits the markets - whether it's a famine, hurricane, war, or market crash - some asset class, company or country always benefits. As my colleague Mike Burnick likes to say: there are profit opportunities found on the flip-side of every crisis! In this case, Brazil is in one of the best places to benefit from these worldwide food shortages, and rising commodity prices.In fact, it's not just food products and iron ore that they export...the Brazilian's just discovered the largest oil field in the Western Hemisphere since the 1970s. So Petrobras, the state owned oil company, is looking pretty good also. Money is flowing into Brazil from literally all over the world. They're not just dependent upon the United States to buy their goods. In fact, China, Asia, and Europe are huge customers of Brazil. That's why the slowdown in the U.S. hasn't even touched Brazil. In fact, their economy expanded 6.6% at the end of last year - while the U.S. slowed to just 0.6%. If that wasn't enough, Brazil just received the coveted "Investment Grade" rating from S&P last month. As a result, a fresh pile of institutional cash is flowing into Brazil right now - and delivering another big boost to Brazilian share prices.
One Investment Grade Rating is Great, But Two - Phenomenal!
It's rumored that Brazil may receive yet another investment grade rating coming from either Moody's or Fitch in the coming months. If that happens, yet another tidal wave of money will pour into Brazil's stocks, real estate, bonds, etc. Usually when you know money is heading towards a country, you have to cherry pick specific index funds or invest in well-positioned stocks to benefit. But I have a way you can invest in Brazil, even if you have no idea where this investment money is heading: Their currency, the real.Let me explain. In order to buy Brazilian stocks or bonds, you're going to have to buy the currency first. Same thing when buying their real estate - you'll need the real to close on properties. So any way you slice it, Brazil's currency will benefit from its booming economy. Some investors argue the "B" of the BRIC nations is already too overbought. It's not. Yes, the Brazilian real has climbed 22% over the last 12 months - more than any of the other top 16 currencies of the world. But I still think this nation could soar even higher. Here's why: Not only is the second round of money about to hit this country but also Brazil is investing in its future.
Making an Investment in Your Own Future
Brazil is already taking steps to ensure they continue prospering. In fact, on May 12th, Brazilian President Lula announced tax cuts for 25 industries. That will stimulate growth. But it gets even better. They are going to give billions of dollars in government loans to help their exports cope even more with the rising currency prices. As of this writing, the Brazilian government has already announced US$12 billion in tax cuts. Plus, they're giving 10 times that amount to finance new machinery and infrastructure over the next three years. Their newly formed Brazilian Sovereign Wealth Fund will also aid Brazilian companies reach overseas and bolster their growth. But wait, it gets even better....Brazilian firms are also investing heavily in consumer electronics, aerospace, bio-fuel, software, and medicines. So Brazil will NOT be a "one hit wonder;" prospering only during the commodity boom years. No they're taking steps now to ensure they will be a viable economy long after the "resource boom" is over. For instance, you'll see over 40 billion reals (US$24.3 million) spent on technology by 2010. Much of this technology is going to rush into these sectors: agribusiness, nanotechnology, biotechnology, biodiesel, perfume, oil, and gas. Brazil's economy could continue to prosper for years to come. This is why a guy like Buffet can comfortably apply his long-term buy and hold strategy in a place like this. He sees how bright Brazil's future is, so he's buying the real. I would recommend you also consider this booming economy when you're building your own diversified currency portfolio.

No comments: