Position: Long Brazil via the etf EWZ
Q. What is the native language of Brazil?
A. Brazilian? Spanish?
Or so goes the popular grade school brain teaser. In fact, the native language of Brazil is Portugese, as Brazil is a former colony of Portugal. There is a lot that is misunderstood about this South American powerhouse, including her growing economic power base.
Brazil’s Finance Minister announced today that the government will extend tax cuts on computer sales and purchases of capital goods, inject $45.4 billion into the state development bank, and cut taxes on the petrochemical industry. The nature of these stimulus measures is in interesting contrast to some of its global counterparts, like the U.S., as these measures involve tax cuts and direct investment into development. Interestingly, Brazil has also avoided cutting interest rates to an emergency level with the Selic base interest rate currently at 8.75%.
One concern is that inflationary pressures are slightly higher in Brazil versus some of its global peers with the 12-month rolling rate coming in at 4.22% in November versus 4.17% in September, but this is still below the government’s target rate of 4.50% and at a reasonable level given the high expected future GDP growth rates.
Brazil has also continued to grow its way up the GDP food chain as it gains competitiveness globally. According to the World Economic Forum:
“Brazil was the top country in upward evolution of competitiveness in 2009, gaining eight positions among other countries, overcoming Russia for the first time, and partially closing the competitiveness gap with India and China among the BRIC economies. Important steps taken since the 1990s toward fiscal sustainability, as well as measures taken to liberalize and open the economy, have significantly boosted the country’s competitiveness fundamentals, providing a better environment for private-sector development.”
We like Brazil for her growth trajectory, relatively managed inflation, and capitalist stimulus. She also has some positive attributes versus our other emerging market favorite, China. Specifically:
- Brazil is a Democratic nation and in fact voting for those between the ages of 18 and 65 is compulsory;
- As is widely documented, China has an old population base that is only accelerating in terms of age due to the One Child Policy;
- China is much more dependent on exports at ~35% of GDP versus Brazil at ~14% of GDP; and
- Brazil is long natural resources, while China is short of them. In this instance, China is the client for Brazil’s resources.
As we look into Q4 2009 and 2010, GDP comparisons look favorable, as both Q1 2009 and Q2 2009 were negative growth quarters in Brazil, which should lead for strong reported growth out of the South American powerhouse. Being long of the fastest growing and most competitive democracy globally is a position we like.
Daryl G. Jones
Managing Director
