The Easiest Way to Invest in Brazil

Ryan Fuhrmann's picture

Tuesday, March 22, 2011 - 9:30am

by Ryan Fuhrmann

Back in November, I recommended three Brazilian stocks I thought were worth owning at the time. Since then, two of the three are outperforming the Brazilian market, with energy giant Petrobras (NYSE: PBR) up more than 20% to handily beat the iShares MSCI Brazil Index Fund (NYSE: ITW), which is down about 4% in the same period.

The same merits for investing in the country hold true a few months later; its population of 200 million citizens represents one of the world's largest markets and the economy is growing briskly at 7% annually. However, the Brazilian stock market is down nearly 6% so far in 2011, on a decline in investor enthusiasm in emerging markets. As the chart below illustrates, this started almost immediately at the outset of 2011.

I still believe one should focus on the largest players in a country when investing in emerging markets. Size has advantages when dealing with suppliers and customers, and in developing markets, the largest firms generally have the support of the government and public capital at their disposal to compete globally. This is certainly true in the case of Petrobras. Petrobras has ambitions to grow to become one of the five largest energy firms in the world within five years and export oil and natural gas on a global scale.

The other company ahead of the Brazilian market since I wrote about it in November is mining giant Vale S.A. (Nasdaq: VALE), which also counts on fast-growing Asia for 50% of its sales of iron ore and related precious metals.

This strategy is bearing fruit, but Brazil also stands out for the robustness of its domestic market as well. My third pick in November, Banco Itau (NYSE: ITUB), is one of Brazil's two largest banks. It is also one of the most profitable, with returns on equity around 20% and impressive growth rates that should continue as Brazilians increasingly embrace bank checking deposits, loans and related financial services.

The point is that identifying individual stocks can be a successful investment strategy. However, there is an easier way to invest in Brazil, which is to simply invest in the Brazilian iShares fund mentioned above. This is a worthwhile strategy given the vast majority of companies in the index do business primarily in Brazil. Given its growing domestic market, it offers appealing exposure well beyond the globally diversified national champions such as Petrobras and Vale.

Brazil is also unique in that its top companies account for the lion's share of its stock market. In the index fund, the top eight firms account for almost 62% of its total market capitalization. Petrobras is the largest firm by far, making up 21% of the index. Vale is next at almost 17% and is followed by Banco Itau, then Banco Bradesco (NYSE: BBD), another large Brazilian bank. Beverage giant Companhia de Bebidas Das Americas (NYSE: ABV), also known as Ambev, comprises just over 3% of the fund.

Below is a chart to detail the fund's top holdings:
 

Action to Take --> When it comes to investing in Brazil, investors can gain broad exposure to the best companies in the country by simply buying the iShares MSCI Brazil Index Fund (NYSE: EWZ). Through this investment, they gain immediate exposure to Brazil's growing national champions, as well as appealing exposure to companies built to benefit from its robust and growing domestic market.

The top eight firms in the fund represent a majority of the index, but there are 84 total holdings that offer broad, diversified exposure to the leading firms in Brazil. As importantly, an investment in the country is timely -- investor enthusiasm for emerging markets has cooled as of late and many seem to be ignoring the compelling long-term appeal of these markets as they develop more consumers that increasingly demand goods and services. Given Brazil's large population, it remains one of the most appealing markets out there and makes for a good long-term holding.

P.S. -- I don't know if you're aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America's electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…

Ryan Fuhrmann does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.