Building a Portfolio Around Brazil's Building

By Stephen D. Simpson, CFA | July 21, 2010 AAA

The next six years are going to busy ones for Brazil. The World Cup is coming in 2014, with the Olympics following two years after. Suffice to say, like virtually every country that has hosted one of those events (let alone both in succession), Brazil has a great deal of infrastructure to build in the intervening years. Brazil is also a large country with a sizable population and a growing economy; all of which takes money to support in its own right.

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If You Build It, They Will Come
In order to support the demands of these two major sporting events, Brazil is looking at wide-ranging projects including upgrading roads and power grids, building hotels, improving airports, and generally just adding "more" to country. Even granting that the sporting events will be concentrated in or near major cities, there will need to be infrastructure stretching into the hinterlands to bring in supplies. All told, the bill just for Rio's Olympics is looking like it will be at least $14 billion.

One Stop Shopping?
Emerging Global Shares Brazil Infrastructure ETF (NYSE:BRXX). This fund holds an array of infrastructure-related companies, with more than 17% weighting in the metals space, nearly 12% in independent power producers, and more than 10% in both transportation and electrical utilities. The expense ratio is a little high here, but not really out of line for foreign ETFs.

My biggest criticism of this fund is that it takes a somewhat idiosyncratic view of "infrastructure". Is a cell phone company like Vivo (NYSE:VIV) an infrastructure company? Yeah, maybe it is, or maybe it isn't.

The DIY Option
Of course, there are other options to build your exposure to Brazil's impending building boom. Investors who have the time and resources to invest directly in Brazil certainly should consider that option. But even for investors who limit themselves to ADRs, there are plenty of options.

Investors can cherry-pick some of BRXX's top picks like iron ore giant Vale (NYSE:VALE) or steel producer Siderurgica (NYSE:SID). Other companies like Petrobras (NYSE:PBR) and Cosan (NYSE:CZZ) are options as well, as all of those bulldozers and trucks will need fuel to operate. And please do not overlook the banks. Not only will major Brazilian banks like Itau Unibanco (NYSE:ITUB) and Banco Bradesco (NYSE:BBD) work as conduits between the government funding efforts and individual businesses, but these banks stand to reap the overall benefits of ongoing growth and development of the country as a whole.

The Hype And The Hope
Countries often try to sell these major sporting events to their own people as opportunities to leverage infrastructure growth into long-term economic growth. History says, though, that it almost never works out that way - in almost every case, hosting a World Cup or an Olympics provides intangible benefits to national pride and social happiness, but the economic benefits usually fail to materialize.

Just because Brazil as a whole will not directly profit from these events, that is no reason for investors not to go along for the ride. A great deal of money is about to be spent on power, water, roads and buildings, and this could be a great opportunity for a savvy stockpicker. I could go on at length about the positives of investing in Brazil, but buying ahead of these major building projects seems like a chance to get in ahead of a major phase in Brazil's development. (For more, check out The World Cup 2010 Portfolio.)

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