Brazil grows more than coffee and ethanol

and could be the next China-like miracle

 

By Martin D. Weiss

Money and Markets

 

Brazil’s ethanol opportunity is just one of many.

 

Take a quick look back to recent history: In the 1970s, Brazil was expanding at the China-like clip of about 9 percent. Each year, Brazil was boosting exports by approximately 20 percent. Within less than a decade, thousands of early investors became multi-millionaires. But the party came to a premature end for one simple reason: inflation.

 

The primary difference today: Brazil’s inflation monster has been tamed. Twelve years ago, Brazil stopped rampant inflation in its tracks by introducing a new currency, the real. Ten years ago, it passed a law preventing federal and local governments from spending beyond their means. And starting four years ago, Brazil’s president has transformed the country from one of the world’s most fiscally shaky nations into a model for fiscal responsibility.

  In his first term, which just ended ...

 

  He reduced consumer price inflation from 12.5% in 2002 to under 3% in 2006.

 

  He paid off every penny owed to the IMF.

 

   He slashed Brazil’s total domestic debt load.

 

  He boosted the value of the real from $0.28 to $0.47.

 

   And he transformed Brazil’s trade balance, formerly a deficit, into a $46 billion yearly trade surplus.

 

This past week, while the Dow tumbled, the Brazilian market fell in tandem. That’s natural and to be expected.

 

But the country is just warming up. In Lula’s second term in office, which began in January, he’s helping to kick off a whole new series of economic reforms.

  Until now, for example, Brazilian entrepreneurs had to plow through endless amounts of red tape to start a new business and then pay at least eight different taxes to operate one. But starting this year, they will enjoy vastly simplified rules for incorporation ... just one, lower tax instead of eight ... plus double the supply of credit.

 

  Also starting this year, investment in Brazil is likely to accelerate. Already, new projects approved by the national development bank have surged 36%. Ford and GM have committed billions to launch new auto models in Brazil. And most significant of all ...

 

  Investments in new Brazilian projects will reach 25% of GDP this year, similar to the levels that have prevailed in China and India!

 

  And all this is before the impact of the deal Mr. Bush and Lula will sign this week.

 

Your next steps

 

Brazil is best known for its production of agricultural commodities — first coffee ... then sugar ... then soybeans ... and, now, ethanol.

 

But Brazil is also among the leading exporters of aircraft ... mineral ores ... metals and steel.

 

And Brazil makes more automobiles than the U.K., Italy, Mexico or India ... and it is the world’s largest maker of cars with flex engines (that can run on either gasoline or ethanol).

 

No investment is without risks, and Brazil certainly comes with its fair share. But after a normal correction, consider some of Brazil’s leading companies traded on U.S. exchanges:

 

Embraer (ERJ) is a $7 billion company that has steadily risen to the #3 spot among the world’s largest aircraft manufacturers — ahead of Canada’s Bombardier and surpassed only by Boeing and Airbus.

 

The company is especially strong in the fast-growing market for regional aircraft — like the 50-passenger twin-jet ERJ 345 and the 37-passenger ERJ 135.

 

And it makes military aircraft for transport, training and light attack — sold not only to the Brazilian Air Force but also to 16 countries in Europe and Latin America, including the United Kingdom, France, Greece, and Mexico.

 

Since January 2002, while the Dow Jones Industrials has risen by 24.7% through last Friday’s close, Embraer is up 102%, rising four times faster than the Dow.

 

Petrobras (PBR) has done even better, rising twelve times faster than the Dow in the past five years.

 

The company has achieved Brazil’s long-yearned-for self-reliance in oil and is leading the country’s drive to expanding ethanol exports.

 

It supplies oil and natural gas to refineries in Brazil and sells surplus production in foreign markets. It refines, transports, and exports oil ... buys crude oil and oil derivatives ... owns petrochemical companies and fertilizer plants ... plus invests in natural gas transportation and distribution, as well as electric companies.

 

But Companhia Vale do Rio Doce (RIO) puts both Embraer and Petrobras to shame:

 

Its shares have skyrocketed 591% over the past five years, rising twenty-four times faster than the Dow.

 

It recently bought Canada’s INCO copper mines, becoming the largest mining and metals company in the Americas; the second largest in the world.

 

It is the world’s largest producer and exporter of iron ore and pellets, the world’s second largest producer of nickel, manganese and ferroalloys, and one of the world’s lowest-cost integrated producers of aluminum.

 

Brazil’s banks have also been growing by leaps and bounds. And the three key Brazilian-owned banks traded on the New York Stock Exchange — Bradesco (BBD), Itaú (ITU) and Union of Brazilian Banks (UBB) — have also beaten the Dow by a wide margin. Bradesco leads the pack, up 362% since January of 2002, or over 14 times more than the Dow.

 

When I was growing up in Brazil, it was almost impossible for individual American investors to buy these companies. Today, it’s as easy as buying U.S. shares: Each is available for purchase as American Depository Receipts (ADRs) right here in the U.S.

 

Or you can use the widely traded Exchange Traded Fund linked to Brazil’s stock market index: iShares MSCI Brazil Index (EWZ), up 243% since January of 2002 (nearly 10 times more than the Dow).

 

 Corrections are natural, but the opportunities are vast.

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MONEY AND  MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin  D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus  Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research  and its staff do not hold positions in companies recommended in MaM. Nor  do we accept any compensation for such recommendations. The comments,  graphs, forecasts, and indices published in MaM are based upon data whose  accuracy is deemed reliable but not guaranteed. Performance returns cited  are derived from our best estimates but must be considered hypothetical  inasmuch as we do not track the actual prices investors pay or receive.  Regular contributors and staff include John Burke, Amber Dakar, Kristen  Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.

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