Laying the BRICs in Brazil

June’s investment call from JNP’s Investment Committee might have raised eyebrows among our clients. But long-time clients have come to expect unconventional wisdom from JNP.

Patrick Tan, our branch founder and executive director of IPP, heads the JNP Investment Committee, which meets bi-weekly to study the investment climate and refine our strategies. Patrick’s guiding principle is to position our clients’ assets for a period of at least10 years, in order to counter inflationary risks and maintain a healthy return on investment (although the exact horizon is tailored to the needs of our individual clients). The key merit of such an approach is that it allows us to take a longterm view of national economies that may seem unattractive in the near term and as a result, get neglected by the mainstream media.

One such country is Brazil. Here’s why.

From the period of 2005 to 2007, Brazil was a shining star. It was placed in the esteemed company of other rapidly growing economies such as Russia, India and China, comprising an informal grouping known as BRIC. Even then, it was overshadowed by its larger groupmates. People remained fixated on the amazing speed of new companies listed on Shanghai Stocks Exchange, or the vast amounts Russia was cashing in from its ‘petrodollars’. Brazil however, remains an underdog with strong fundamentals worth rooting for. Brazil is the largest national economy in Latin America and ninth largest in the world. To start off, the country’s population is the 6th largest in the world (and the largest in Latin America) growing at approx. 1.3% per year, and it is relatively young, with 42% under 20 years of age. This comes as a huge advantage when foreign investors search for countries with abundant labor. The country is also uncommonly blessed with the right natural conditions to grow their main export crops of sugar cane, coffee beans and soya beans. This gives it a continuous edge as a exporter.

Although it was once laden with debts, Brazil managed to ride on strong commodity dollars in 2006 and 2007 and drew some U.S.$160 billion into the central bank's reserves, giving it a strong current account surplus. It’s growth can be attributed largely to the successful leadership of its president Luiz Inacio Lula da Silva, currently in his second term. One of his biggest contribution was to reduce inflation significantly, from a roaring 17.5% in 2003, to a stable 4% today. Even in a gloomy 2008, Brazil’s GDP increased 5.4% to US$1,463bn, the fastest rate of growth since 2004. Total Brazilian international reserves (US$196bn) now exceed the total foreign debt (US$163bn) by more than US$30bn, a fact that should allow Brazil to achieve a risk classification of 'investment grade'.

Of course, Brazil was not unscathed by the sliding stock markets due to the sub-prime crisis. The stock exchange, the Bovespa, fell more than 30% in the period between 2008 and 2009. And this is precisely why JNP is moving aggressively into this emerging market, viewing it as a highly attractive investment region.

Looking into the future, Brazil’s favourables remain strong. As China has overtaken the United States to become Brazil’s single biggest trading partner, its unstoppable rise will contribute a big part to the future of Brazil. Brazil also has huge new sources of offshore oil and is the world's largest exporter of ethanol, which could give it an important role in helping the U.S. wean itself from Venezuelan crude oil and shift to cleaner sources of energy. The country is also experiencing a rapid rise in the "middle classes" which is growing by over 8% per annum. This has a high chance of mirroring the growth of China which sees its domestic population buying a huge quantity of their own produce, reducing the dependance of exports. And not insignificantly, should Rio de Janeiro’s bid to host the Olympics in 2016 be successful, the associated prestige and infrastructure investment gives it a very high chance of leap frogging its growth way ahead of other emerging economies.

As Brazil’s President Lula once said: "Important banks - very important banks - that spent their lives giving advice about Brazil and what we should or shouldn't do are now broke. Brazil is more prepared than any country in the world to deal with the new global economic landscape, and has been preparing for some time to become a solid economy."