Times are pretty tough across most of the emerging world, but seem especially difficult in BRIC superstar Brazil. Falling commodity prices and slowing growth coupled with political and social unrest have sent shares of Brazilian firms downwards since the beginning of the year. Overall, broad measures- like the benchmark iShares MSCI Brazil ETF (NYSE:EWZ) –have lost about 25% of their value since the beginning of the year.
As investors have focused on the short-term headwinds facing the emerging market leader, longer term values are beginning to show themselves. One of which could be in Brazil’s massive and growing consumer market. For investors, betting on Brazil’s buying could be one of the better bets over the longer term and now could be a great time to do just that.
SEE: Investing In Brazil 101
Boom In Consumerism
The change in consumer behavior that is currently underway in Brazil can be compared to America's post-WWII period of the 1950s and 1960s. During this time, everything from durables, household products and personal care goods saw an increase in sales.
For Brazilian citizens, that trend is shaping up to be just as big.
While the previous decade helped bring many families out of poverty, the current decade is being marked by a growth in affluence. According to research conducted by Boston Consulting Group (BCG), some 5.3 million households will rise from the restricted to the emergent middle-class segment in Brazil over the next ten years. At the same time, an additional 1.6 million and 1.9 million families will enjoy established middle-class and affluent lifestyles, respectively. Overall, families in these middle class categories will make up 37% of Brazilian households by 2020. This compares to just 29% back in 2010 and 24% in 2000.
These newly emerged middle class residents will result in annual spending power of about 3.2 trillion Brazilian reals- $1.6 trillion by 2020. That massive spending power will mean that citizens will demand have more access to appliances, electrical goods and travel opportunities. Additionally, growth in personal/financial services, and private education will explode as more families move up to the affluent -more than $45,000 per year in earnings- category.
Already, this is holding true as Brazilian sales are growing four times faster than the U.S. Retail sales in the emerging market nation are increasing at 7 to 8% a year. Meanwhile, with high debt loads and stubbornly high unemployment, the U.S. is only seeing retail sales growth of about 2%.
Making A Brazilian Consumer Play
Given the long-term consumer story and the recent downturn in Brazilian stocks, investors may want to give those firms catering to its new middle class a buy. The most direct play is through the Global X Brazil Consumer ETF (NASDAQ:BRAQ). The fund tracks 35 different consumer plays including food manufacturer BRF S.A. (NASDAQ:BRFS) and sugarcane firm Cosan (NYSE:CZZ). However, while the ETF does hone in on the theme, trading volumes and asset under management continue to be anemic- despite launching in 2010. A better play could be the broad iShares S&P Global Consumer Discretionary ETF (NYSE:RXI). That fund features several firms- like Estée Lauder (NYSE:EL) –which are deriving a high percentage of their earnings from the nation.
Or Investors could go the individual Brazilian stock route.
A prime candidate could be fast food kingpin Arcos Dorados (NYSE:ARCO). The company offers a play on the nation's consumers appetite for more “American” style foods as it is the largest South American McDonald's (NYSE:MCD) franchisee with over 2000 restaurants in 20 countries. However, the bulk of them in Brazil at 735- with the nation contributing almost 48% of all of ARCO’s sales. The stock continues to trade below its IPO price, despite paying a good dividend and offering much growth potential. Likewise, Companhia de Bebidas das Américas (NYSE:ABV) or AmBev is also a great play on growing beer consumption within the nation.
Operating more than 1600 hypermarkets, supermarkets, department stores across Brazil, Companhia Brasileiras de Distribuicao (NYSE:CBD) represents a direct play on rising spending. That rising spending is translating to rising earnings as the firm predicts that sales will grow by more than 10% throughout 2013.
The Bottom Line
With Brazilian stocks currently down in the dumps, long-term investors currently have the opportunity to load up on one of the biggest trends affecting the nation- its rising consumer wealth. For portfolios, the previous picks- along with bank Itaú Unibanco (NYSE:ITUB) –make ideal selections to play the $1.6 trillion potential.