Brazil-A Great Future Becoming the Present?

Wednesday, August 13, 2008

The fifth largest country and the fifth most populous (191 million) country in the world is already a superpower in energy and agriculture and has impressive claims in a number of other areas as well.

Let's start with the economy in general. According to Wikipedia, Brazil is the tenth largest economy in the world and ninth in purchasing power. From 2003 to the present, Brazil has run trade surpluses and according to The World Fact Book, estimated real GDP growth rate in 2007 was 4.5%. After a rocky period from the 1990's through 2003, political /economic policies stabilized and in February of this year, the Brazilian government announced that it has become a net foreign creditor. Standard and Poor's issued its first ever investment grade rating for Brazil in May of this year.

Brazil is very impressive in an array of specific areas. It is the third largest producer in the world of hydroelectric power and that accounts for about 80% of Brazil's power generation. Brazil will be able to build on an already enviable energy base of biofuels with its recent major oil discovery off the coast of Rio that has the potential to boost Brazil into one of top ten oil producers in the world. Also, keep in mind that much, maybe even most, of Brazil's natural resources have not yet even been mapped.

Brazil has a serious aerospace industry including the Embraer airliners and is the source of more gems than any other country in the world. Brazil has a well diversified economy that in addition to many agricultural products includes textiles, finance, petrochemicals, consumer durables, and equipment manufacturing.

Not all upside of course. Urban violence, corruption and poverty with one of the more inequitable distributions of wealth in the world are major issues. Also, the complexity and inefficiency of the political and governmental systems rivals or even exceeds that of the US. Brazil ranks 70th in the world for economic freedom according to the 2007 Index of Economic Freedom-a joint publication of The Heritage Foundation and The Wall Street Journal.

So how does all of this come together or not relative to investments? The Brazilian currency, the Real, has appreciated nicely (YTD about 16% relative to the US Dollar) and in the last 5 or 6 years the Brazilian stock market has gone up about 6 fold. Also, foreign investment almost doubled from 2006 to 2007 and is still on a roll. However, at least two significant caveats. First of all, Brazil is no Singapore in terms of being a business friendly environment for either Brazilians or foreigners. Secondly, the amount of economic growth in Brazil is not impressive given the level of foreign investment.

In conclusion, Brazil appears somewhat similar to China at present in that the indicated smart plays may involve finding ways to go along for the ride without actually getting in the car.

And Now for the Quote of the Month

Jeff Stahler is a local, talented cartoonist in my part of the country who is syndicated nationally. I greatly enjoy his work. In addition to editorial page cartoons, he does a single frame daily cartoon entitled Moderately Confused. My favorite of a while back shows a father playing Monopoly on the floor with his small boy. The boy, with a fist full of bills, is looking up at this father as he says "Wait a minute..this is just U.S. currency".

David J. Garling, PhD, MD

The articles contained on this website are for informational use only and are in no way to be construed to be investment advice.

Neither Dr. David Garling's commentary, nor any opinion contained in this site constitutes a solicitation or offer by Key Investment Group or its affiliates to buy or sell any securities or any other financial instruments.
The opinions expressed by Dr. David Garling are his only and do not necessarily reflect the opinions of Key Investment Group or any of its affiliates.

Key Investment Group has not independently verified the information supplied by Dr. David Garling, and cannot make any representations as to its accuracy. Even though every effort has been made to assure that the accuracy of the material contained in his articles is correct, Key Investment Group cannot be held liable for any errors, omissions or inaccuracies.