Brazil the new China???

Brazil is currently the slowest growing BRIC (Brazil Russia India China) emerging market country. This is mainly due to very restrictive regulations on setting up and operating businesses. For example, it takes 150 days to set up a business in Brazil, due to paperwork. The huge mass of Brazilian bureaucracy is currently putting the ‘brick’ on the brake pedal.

Brazil is also one of the most eco-friendly countries on earth, which could help its tourist industry and standing in the global economy. Brazil has so far not been hit by any SARS/Bird-flu pandemic, as chicken breeding is less common in South America than in Asia, so therefore there is less risk of a crash in Latin America due to a pandemic compared to Asia. On the other hand, the Chinese government has removed all regulations stopping economic growth, including safety, workers rights and quality-control regulations (think lead-poisoned childrens toys). Even in government run projects, such as the Three Gorges Dam, cheap, low-quality materials have been used to save on construction costs. Also, Chinese industry dumps millions of tonnes of raw industrial waste into rivers every year. Air pollution, especially in Hong Kong, is endangering health, and the governing regime takes only halphhazard measures to contain potentially fatal SARS/Bird-flu virus mutations, putting financial concerns before everything else.

Obviously, neither of these two situations can continue forever. China’s growth rate is artificially inflated by a money-centered government which is subject to a downfall at any time, whereas the Brazillian economy is yet to unlock its full potential. When Brazil’s government abolishes its restrictive practices (its already starting: it will soon take only two weeks to set up a business), we will see Brazil’s growth rate rocket. At the same time, due to European and American pressure, safety, employment and merchandise quality regulations will be put on Chinese goods. This could slow down significantly the Chinese economy.

Also, Brazillian stocks are very cheap compared to Chinese ones, so you may as well snap them up while you can: some Chinese companies have P/Es of 35+, while Itau Bank’s P/E is sensible at just 13.

So what Brazilian stocks would make a good investment? How about Itau (ITU) or Unibanco (UBB), the country’s second and third largest banks. These companies are well positioned to enjoy strong future growth, due to their desirable positions in a high-growth developing economy. Brazil currently has less than a quarter of the number of homes per capita compared to Mexico. It is anticipated that over the next few years, fueled by government subsidization, many more housing units will be built in former shanty towns, therefore increasing the amount of mortgages these firms sell, and thus increasing profits.

It is said that Brazil has such an enviable wealth of natural resources that ‘God is Brazilian’! ( source ) The Amazon rainforest is a great source of wood to make paper (see Aracruz Celulose (ARA)), everything from coffee to bananas to oranges grows very well there, Brazillian beef production is so high that European farmers have to fight with the European Commission to keep it out of the EU, and at the time of writing, it is the worlds second largest biofuels producer after the US. The country is also a major iron ore exporter, so take a good look at Companhia Vale Do Rio Doce (NYSE:RIO) then, the worlds #1 iron ore producer (see http://www.answers.com/Companhia+Vale+Do+Rio+Doce?cat=biz-fin ). Lately, Petrobras (NYSE:PBR) has struck oil in the Tupi oilfield, perhaps making Brazil as big as Norway in the oil production field ( see http://www.economist.com/displayStory.cfm?story_id=10134215 ). So with a pile of oil, biofuels, food (food prices are forecast to increase), wood and iron ore, doesn’t Brazil look good as commodity prices rocket?

Good Luck,

~~~Shane Halloran.