BRIC Star Brazil
Michael Orme - Wed 17 Oct, 2007
Brazil, Russia, India and China form what Goldman Sachs christened the BRIC a few years back.The BRIC was suggested to become the world's dominant economic group by 2030. Ian Bremmer of Eurasia, sees Brazil as a 'low risk' opportunity when compared to the others. The signs look good under Lula da Silva: Brazil's hyper-inflation has been beaten, it runs a trade surplus of $40bn a year, and is on schedule to repay its international debt.But perhaps the strongest reason to look at Brazil is that it is insulated against some of the biggest problems facing the rest of the world.
What comes to mind when you think of Brazil? Beaches, favelas, coffee and football probably. Brazil as the next superpower? Probably not. Brazil as one of the best mid-term investment bets? Again, probably not.
Well, Ian Bremmer of Eurasia, a top political and soft infrastructure analyst, sees Brazil as a 'low risk' opportunity compared to Russia, India and China, where many of the worlds fund managers' interest is focused.
Brazil, Russia, India and China form what Goldman Sachs christened the ‘BRIC’ a few years back. They suggest that the BRIC is going to become the world's most dominant economic grouping by 2030.
Now, before we look at Brazil let's briefly analyse the rest of the BRICs constituents. Basically, Russia is Putin's fiefdom and enjoys playing power politics with foreign businesses and investors. It has awful demographics, a contracting population and a shocking health record thanks to alcohol abuse and AIDS. In addition, it is in danger of becoming a 'Saudi with snow'. It shows few signs of developing sufficient economic diversity to dilute its dependence on petro-chemicals.
India has tremendous pent-up problems. In the countryside there's almost a suicide epidemic among stricken farmers. And Islamic fundamentalists, notably from the Deobandi sect in Pakistan, threaten the stability of the whole subcontinent.
China has 'terrific social unrest', which is kept out of the public eye by the world's most advanced police state. But it shows signs of cracking. Pressures include balancing economic growth with satisfying its growing middle class. Also, it has to combat the world's worst pollution, and deal with a deluge of migrants from an increasingly 'deserted' countryside into its cities. Moreover, some sharp analyst based in Hong Kong reckons that the Shanghai Stock Exchange is now
Well, Ian Bremmer of Eurasia, a top political and soft infrastructure analyst, sees Brazil as a 'low risk' opportunity compared to Russia, India and China, where many of the worlds fund managers' interest is focused.
Brazil, Russia, India and China form what Goldman Sachs christened the ‘BRIC’ a few years back. They suggest that the BRIC is going to become the world's most dominant economic grouping by 2030.
Now, before we look at Brazil let's briefly analyse the rest of the BRICs constituents. Basically, Russia is Putin's fiefdom and enjoys playing power politics with foreign businesses and investors. It has awful demographics, a contracting population and a shocking health record thanks to alcohol abuse and AIDS. In addition, it is in danger of becoming a 'Saudi with snow'. It shows few signs of developing sufficient economic diversity to dilute its dependence on petro-chemicals.
India has tremendous pent-up problems. In the countryside there's almost a suicide epidemic among stricken farmers. And Islamic fundamentalists, notably from the Deobandi sect in Pakistan, threaten the stability of the whole subcontinent.
China has 'terrific social unrest', which is kept out of the public eye by the world's most advanced police state. But it shows signs of cracking. Pressures include balancing economic growth with satisfying its growing middle class. Also, it has to combat the world's worst pollution, and deal with a deluge of migrants from an increasingly 'deserted' countryside into its cities. Moreover, some sharp analyst based in Hong Kong reckons that the Shanghai Stock Exchange is now
overvalued by 70%-75%. This bubble will inevitably burst, causing further socio-political problems.
Brazil, by contrast, has many strengths. But before we get too excited we must acknowledge that it is a corrupt, over-regulated and violent society with glaring inequalities. However, the same applies to the other BRIC nations. The point is the extent to which the country is improving.
The signs look good under Lula da Silva, a former hard-nosed union negotiator, and an arch pragmatist unlike the ideologue Hugo Chavez to the north in Venezuela. Under Lula, Brazil's hyper-inflation has been beaten. It runs a trade surplus of $40bn a year, and is on schedule to repay its international debt. Lula has also created over five million jobs since 2000, and is tackling over-regulation.
Other good signs include Brazil's GDP growth. It grew by 5.4% in Q2 2007 compared to Q2 2006. Also its bank rate is down to an unheard of 11.25%, and consumer spending was up 5% in Q2.
It's nearly certain that Brazil will achieve 'investment grade' status within the next two years. This will open it up to many foreign investment institutions. And make borrowing cheaper in the money market.
That alone is a good reason to take a look at Brazil as a place to invest. Another reason is that in the improved economic climate, Brazil is spawning a flourishing middle class. There are over 20 million middle class households in Brazil. There were only 14 million at the turn of the century. Relatively, this means Brazil's middle class is five times larger than either India's or China's.
A significant pointer of the rising confidence in Brazil for investors - in either stocks or property - is that the leading credit rating company, Experian, recently acquired Brazil's largest domestic agency.
Brazil's largest private bank, Santander, forecast that by 2010 a million new homes will be sold in Brazil, with 60% of them backed by mortgages. In 2005 there were only 600,000 house sales and only 40% were backed by mortgages. Mortgages are on track to account for 10% of GDP by 2010, versus 2% today.
Another plus point for Brazil is it’s excellent placement to take advantage of the soft commodities boom.
Brazil, by contrast, has many strengths. But before we get too excited we must acknowledge that it is a corrupt, over-regulated and violent society with glaring inequalities. However, the same applies to the other BRIC nations. The point is the extent to which the country is improving.
The signs look good under Lula da Silva, a former hard-nosed union negotiator, and an arch pragmatist unlike the ideologue Hugo Chavez to the north in Venezuela. Under Lula, Brazil's hyper-inflation has been beaten. It runs a trade surplus of $40bn a year, and is on schedule to repay its international debt. Lula has also created over five million jobs since 2000, and is tackling over-regulation.
Other good signs include Brazil's GDP growth. It grew by 5.4% in Q2 2007 compared to Q2 2006. Also its bank rate is down to an unheard of 11.25%, and consumer spending was up 5% in Q2.
It's nearly certain that Brazil will achieve 'investment grade' status within the next two years. This will open it up to many foreign investment institutions. And make borrowing cheaper in the money market.
That alone is a good reason to take a look at Brazil as a place to invest. Another reason is that in the improved economic climate, Brazil is spawning a flourishing middle class. There are over 20 million middle class households in Brazil. There were only 14 million at the turn of the century. Relatively, this means Brazil's middle class is five times larger than either India's or China's.
A significant pointer of the rising confidence in Brazil for investors - in either stocks or property - is that the leading credit rating company, Experian, recently acquired Brazil's largest domestic agency.
Brazil's largest private bank, Santander, forecast that by 2010 a million new homes will be sold in Brazil, with 60% of them backed by mortgages. In 2005 there were only 600,000 house sales and only 40% were backed by mortgages. Mortgages are on track to account for 10% of GDP by 2010, versus 2% today.
Another plus point for Brazil is it’s excellent placement to take advantage of the soft commodities boom.
Grain prices have risen by 300%-400% over the past two years. And the agricultural commodity boom still has a long way to go. The US government's reckless support for corn-based ethanol, ‘Chindia's’ move to a meat-based diet, the high price of oil and Chindia's lack of water have all put pressure on grain prices. It needs to be noted that the shift to meat diets in Asia is one of the big factors behind the dearth of grain for the world market, as 70% of all grains are used as animal feedstuffs.
But perhaps the strongest reason to look at Brazil is that it is insulated against some of the biggest problems facing the rest of the world. This includes shortages of fresh water, agricultural commodities and secure supplies of energy.
The country has nearly 20% of the world's fresh water and accounts for over 20% of the world's agricultural commodities, notably grains. Indeed, China now gets a third of its foodstuffs from the vast farmlands of Brazil.
On the energy front, after decades of focus and development, much of Brazil's fleet of vehicles runs on ethanol. Also it has enough oil to cater for the rest of its power needs. This means it is relatively insulated against swings in the price of oil.
So is Brazil set to explode? Only if we never forget that we're operating in a world of relativities, not absolutes, often making choices between the bad and the worse.
In terms of its fundamentals and its future scope Brazil looks relatively strong - not just against the rest of the BRICs - but also against up and coming states like Vietnam, the Philippines and Mongolia.
Let the investment carnival begin? Well, steady. It's all about bubbles these days, but there are bubbles and then there are bubbles! For example the US housing market and the Shanghai stock market at one extreme - burst or fit to burst. What we're suggesting here is simply that the Brazilian bubble is only just forming.
Regards,
Michael Orme
For The Daily Reckoning
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