With inflation beginning to rear its ugly head in a variety of emerging-market nations, central banks in those countries have begun the process of cooling their economies. The potential of lower economic growth in the year ahead has investors fleeing funds like Guggenheim BRIC ETF (NYSE: EEB). However, with so many portfolios heading for the gates, many of these nations are again appearing to be long-term bargains. Latin American states are well positioned to take advantage of the long-term shift towards emerging-market dominance and Brazil is at the head of the pack.
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Opportunities in Rio
Consumer prices in Brazil rose nearly 6.3% in March versus a year earlier to their highest point since November 2008. The nation's inability to rein in inflation and its currency is making investors nervous. As a result, the Bovespa stock index has been the worst performer in Latin America in the past year, falling more than 5%. However, this fall makes Brazilian stocks the cheapest in Latin America. Brazil trades at just 10.7 times analysts' earnings estimates, compared to Mexico's 15 times and Chile's nearly 17 times.
Brazil's current "cheapness" offer investors a way to play one the best long term-growth stories. Analysts estimate that Brazil's gross domestic product (GDP) will grow 4.5% throughout 2011. The nation is host to a number of qualities which will make it a promising timeless bet. These qualities include its beefy exposure to the energy and commodities industry. As the continued usage of natural resources is trending upward, price pressures on these resources will increase. Brazilian exports to China have risen from about $1 billion in 2000 to $30.7 billion in 2010. The country is in a unique place as the revenue generated from many of these resources lead to surpluses.
Brazil boasts one of strongest emerging market middle classes with nearly 50% of its citizens achieving the middle class socio-economic standing. In addition, The South American leader has started a major spending spree to improve its infrastructure as it has been selected to host the 2016 Summer Olympics and 2014 World Cup Soccer Championship. In a study by Brazil's Ministry of Sports, these two sporting events could bring in nearly $51 billion into Brazil's economy through 2027 and add approximately 120,000 jobs annually through 2016, directly benefiting its middle class.
Finally, Brazil's new female president Dilma Rousseff has assured she will continue in her predecessor's footsteps with successful economic policies and that she is not looking to become less business friendly. Rousseff has recently met with President Obama and is heavily involved with Chinese officials to work on trade agreements.
With the long term-story in Brazil being positive, investors can use the short-term underperformance as a way to add the nation to their portfolios. The iShares MSCI Brazil Index (NYSE: EWZ) is the largest and most liquid of the Brazil ETFs and features companies like Vale (NYSE: VALE) and Petroleo Brasileiro (NYSE: PBR). The EWZ is often the default option for many investors in the space. While the Global X Brazil Consumer ETF (NYSE: BRAQ) offers a targeted play on its consumers. However, there are other ways to add the nation.
Recently IPO'd Arcos Dorados (NYSE: ARCO) offers a play on the nation's consumers. The company is the largest South American McDonald's (NYSE: MCD) franchisee with 1,755 restaurants in 19 countries. Arcos Dorados accounts for about 5% of all global dollars spent at McDonald's restaurants.
With its 2.6% dividend yield, fuel distributor Ultrapar Holdings (NYSE :UGP) has seen considerable top-line and bottom-line growth. The company is poised to be a major beneficiary of Brazil's energy industry.
Air travel in Latin America is on the rise and will continue to grow as more people are able to afford to do so. Regional airline GOL Linhas Aereas (NYSE: GOL) is a way for investors to play Brazil's growing middle class. Over the short term, stable fuel costs and a strong Brazilian real have benefited the company. GOL is also quite efficient versus competitors like TAM S.A. (NYSE: TAM), with operating margins of 8%.
Recent inflation worries in the emerging markets have given investors an opportunity to add of the best and brightest to their portfolios. The right combination of natural resources, growing middle class and strong government makes Brazil a top long term buy. The previous stocks and funds make participating in the nation's growth easy. (Brazil is well positioned for future growth, and luckily for investors, it also has a very liberal investing climate. See Investing In Brazil 101.)
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