Beaten Down Brazil Offers Opportunities

By Aaron Levitt | October 24, 2012 AAA

With Europe still dealing with its debt woes and the fiscal cliff quickly approaching here at home, investors have been drawn to emerging markets as a way to continue growing their portfolios. Much of that focus has been thrust towards the various BRIC nations. Recent underperformance in the four horsemen of the emerging world, however, has turned the media darlings into pariahs. That's leading to some pretty values in the BRIC's equity markets.
Perhaps the biggest of these markets is Latin American superstar Brazil. Featuring the right combination of natural resources, a steadily growing middle class and strong pro-market government reforms makes Brazil a top long-term buy. Investors now have an opportunity to add at bargain basement prices.

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Recent Underperformance, Long-Term Gains
With its rich plethora of natural resources, a young, increasingly wealthy demographic and conservative financial picture, Brazil has established itself as one of the planet's economic victors. After a key election in 2002, Brazil underwent a wave of pro-market reforms. This helped ensure the independence of its central bank, shrank its budget deficit and helped successfully develop the nation's vast natural resources. To that end, the nation became a market darling and between 2004 and 2008, Brazil's stock market surged a staggering 350%.

However, nothing lasts forever. Facing a trio of high inflation, government intervention into the nation's top companies and a slowdown in global commodity demand, Brazil's economy slowed substantially last year. According to a recent forecast by the International Monetary Fund, Brazil's economy is only expected to grow at a rate of 1.5% this year. That's down from 7.5% GDP growth in 2010. As such, its equity markets have fallen about 20% since 2008 and some of its top companies have plunged even more. Iron ore and global miner Vale (NYSE:VALE) is down a staggering 60% from its 2008 highs.

Yet, the long-term picture still remains rosy for the Latin American nation. Aside from its vast natural resource wealth, Brazil's consumer story is still robust and has been surprisingly resilient in the face of its recent economic struggles. Sharp increases to the minimum wage, increased access to credit and pro-consumer reforms have continued to strengthen the consumer story in the nation.

At the same time, the nation's Growth Acceleration Program plans to invest more than $500 billion in infrastructure projects over the next few years. Already, Brazil has committed more than $11.3 billion to World Cup preparations and $14.4 billion for the Rio Olympics.

SEE: Build Stable Wealth With Infrastructure

Buying Rio
All in all, these reforms and stimulus measures should reignite Brazil's long-term upwards swing. For investors, the current depressed state of its markets could be just the entry point they need to add the nation to a portfolio. The easiest way to add the nation is through the iShares MSCI Brazil Index (NYSE:EWZ). The ETF tracks 79 different Brazilian firms including energy giant Petrobras (NYSE:PBR) and financial firm Itaú Unibanco (NYSE:ITUB). So far, year-to-date the ETF is down 4.64% making it quite the bargain.

Perhaps a better portfolio play could lie in Brazil's rich consumer market. Fast food kingpin 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 1,840 restaurants in 20 countries - the bulk of them in Brazil. Shares of the firm can currently be had for below its IPO price and Arco's recently reaffirmed the company's dividend. Likewise, brewer Anheuser-Busch InBev's (NYSE:BUD) Brazilian subsidiary Companhia de Bebidas das Américas (NYSE:ABV) or AmBev is also a great play on growing beer consumption within the nation.

Finally, while there is still much debate over the health of the housing market in the United States, the growing middle class in Brazil are buying homes. Gafisa (NYSE:GFA) is a homebuilder operating across several different income levels in Brazil. While the firm has struggled with profitability as of late, analysts at Barclay's estimate that Gafisa could see share price appreciation of roughly 80% above current levels.

SEE: Has Brazil's Economy Peaked?

The Bottom Line
Investing internationally is important for long-term portfolio health. The recent market swings have opened up opportunities to add emerging market exposure and Brazil is a choice destination. Through the previous picks, as well as exchange traded funds such as the Global X Brazil Consumer ETF (ARCA:BRAQ), investors can tap into this growth.

At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.

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