THE BANKER Brazil: Riding the commodity super cycle

In September, Brazilian�s state-owned oil and gas champion Petrobras successfully raised $67 billion, the world�s largest ever offering by a wide margin. Foreigners flocked to buy shares, and the offer was so great it drove up the currency. That�s a very different kettle of fish to 10 years� ago when Brazil�s tiny exchange was an expensive joke. Insiders traded on whispers and corporate owners did not bother to consult minority shareholders on major decisions. The whipsawing market was widely and wisely avoided by foreigners. Today, the country�s BM&FBovespa combined derivatives and cash exchange is a giant. It lists 375 companies, with a total market cap of �838 billion, making it the 10th largest exchange in the world. Over five years, the index has returned more than 120 per cent. Moreover, the mood in tropical Brazil could not be more different from insecure Britain with its dispiriting shower of cuts. Brazilian GDP growth is set to be higher than 7 per cent this year and credit to consumers is set to expand over 15 per cent. But how do you start to think about investing? Many large investors use top down themes to drill down. The purchasing power of the up-and-coming middle class has given a shot-in-the-arm to domestic-focused companies. Altair Rossato, head of consumer business industry Deloitte in S�o Paulo, says in the three years to June 2009, Brazilian consumer spending grew 45 per cent while in the US it decreased by 5 per cent. Low income consumers are after mobile phones and TVs while higher earners are looking to upgrade cars and spruce up home furnishings. Urban Larson, director in the emerging markets equities team at F&C, likes consumer stocks in beverage and retail and points out there are plenty of well run banks to invest in. More indirect ways to access the consumer pocket include education, health companies or homebuilders. Brazil is also a commodities powerhouse. The climate gives producers a bigger bang for their buck: a tree that takes 70 years to grow in Finland takes just seven in Brazil. Better farming techniques have seen the rapid spread of soya, maize, cotton, coffee and cattle farming. One way to access this is through meatpackers, who have transformed themselves from local abattoirs to international �protein providers� to the world. Hard commodities are the other mainstay. Mining is huge and iron ore miner Vale the second largest company on the exchange with juniors nipping at its heels. A steel industry has grown round this bounty and Brazil has some of the biggest and most international steel firms in the world. Lastly, huge oil and gas discoveries have been made off the coast which explains why Petrobras needs new funds. Still, its recent fund raising exercise was fraught with some frankly pretty blatant government intervention and deposits are very deep and trapped beneath layers of salt so some canny investors are looking at suppliers to the state giant rather than direct investment. Is this a good time to buy and is there still value? Larson thinks so. He has recently been upping his positions in Brazil. Domestic demand is still very strong, he says. �When we talk to Brazilian companies, they still have a very favourable outlook,� he notes. The market looks cheap compared to many other emerging markets, trading on average at 9.5 times forecast 2011 earnings, he adds. For those looking to diversify portfolios, there are a number of ways to play Brazil. Latin and Brazilian actively managed and Exchange Traded Funds (ETFs) are mushrooming and specialist funds are emerging in areas such as small-caps. For those keen to have more control over their portfoios, the New York stock exchange lists some 30 Brazilian companies in the form of American Depository Receipts. A risk that needs to be weighed up very carefully is the currency. The real has been one of the best performing in the world and increased 30% against the dollar over the last 18 months. Today, S�o Paulo is the most expensive city in the Americas. A currency collapse is not likely with so much investment pouring in, but most economists think the real is likely to weaken against major currencies in the short-term. Then there�s the trust question. The BM&FBovespa is one of the most sophisticated exchanges in the emerging markets. Even so, it does not have a long track record and is less liquid than large developed markets while news flow can be patchy. Distance and the activities of plugged-in local day traders means intra-day trading from the UK is highly risky. Rumours and local gossip drive short-term trading, says Larson. �To attempt to do this from London would be a great way to lose money,� he concludes.

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