Sport spectaculars could also draw investors to Brazil

Emerging markets are not everyone's cup of tea. There's something to be said for staying at home and investing in companies that matter in our everyday lives. It's a safe and steady approach and investment managers have a hard time advising their clients otherwise.

That's understandable. It takes a certain type to place their money abroad, someone a little adventurous, I suspect, who is looking for the big score, and is prepared to accept the risk that comes with an overseas market in a different time zone, on another continent, with an unfamiliar currency, where anything from an overnight military coup (think Honduras), political instability (think Romania), or a scam (think Bre-X) can wipe out their investment while they're asleep. Definitely not something you want to wake up to.

Most Canadian investors prefer to seek out multinational corporations closer to home in Manhattan. Over the long term, America's corporates have delivered the goods with the nastiest surprise occasionally coming from a surging Canadian dollar that bites into dividends.

When overseas interest has beckoned, it generally focuses on a diversified mutual fund, heavy with European or Japanese names. South America seldom gets a look.

That changed last week when Rio de Janeiro was awarded the 2016 Summer Olympic Games. Coming on the heels of Brazil being awarded the 2014 FIFA World Cup of soccer, investment managers were left furiously speculating how beneficial the world's two biggest sporting events two years apart could be for the country's economy.

For the longest time, Brazil, resource-rich, and a major exporter of metals, minerals and commodities, with vast offshore oil reserves in which it is investing $150 billion, has been viewed as the country of the future. With a population of 190 million, it is now a centrist-based consumer society that is being driven by higher income levels and easier access to credit.

Bank of America-Merrill Lynch chief economist Virgilio Castro Cunha offers a rosy outlook. He estimates corporate earnings growth will jump 26 per cent next year, driven by robust domestic activity and a soft recovery on commodity and volume prices. He has raised his 2010 growth forecast to 5.3 per cent from 4.5 per cent.

The Bovespa stock index, based in Sao Paulo, the Brazilian equivalent of the S&P/TSX composite index, has about 60 listed companies and is the largest capitalized stock market in Latin America.

The index is trading at a 15-month high and is the best performing index in the world this year with a return of 67 per cent.

Factor in the strength of the currency, the real, and the return for a Canadian investor is closer to 100 per cent, so investing in Brazil may not be such a nutty idea, after all.

Brazil is the "B" in the BRIC group with Russia, India and China, considered to be the fastest growing developing economies, and there are mutual funds, such as the Templeton BRIC Corporate Class Fund, that serve this market.

"When it comes to growth and investment value, Brazil has become the BRIC's ignored fourth wheel," says Danny Furman on the investment site SeekingAlpha. com.

"Russia has ridden the oil roller coaster and most studious emerging market investors have focused on China's huge stimulus package and increased consumption as well as India's political shift. Brazil is assumed to have garnered equal attention, given the country's acronym leading position, but volume and price simply don't agree.

"Brazil's economy, from all indications, might be the best poised in the world. Bank balance sheets are relatively clean and consumption is at an all- time high in what has traditionally been an export-reliant economy. Power and water usage are up and favourable trade terms with China are apparent."

In fact, China has supplanted the U.S. as Brazil's biggest trading partner.

For Canadians, American Depositary Receipts (ADRs) that trade on the New York Stock Exchange offer the most immediate hands-on investment. There are about 35 ADRs and most of them are internationally recognized names. They include steelmaker Gerdau S.A. (GGB), mining giant Companhia Vale do Rio Doce (VALE), state-controlled oil and gas company Petroleo Brasileiro S.A., better known as Petrobras (PBR), giant soft drink distributor Companhia de Bebidas das Americas, known as Ambev (ABV), Cosan, an independent ethanol producer (CZZ), Brasil Telecom (BTM) and Bombardier rival Embraer (ERJ).

The iShares Brazil Index ETF (EWZ) that tracks the Bovespa offers diversification. Units that last November dropped to a 52-week low of $26.64 US have surged to $69 US, an increase of 159 per cent.

That doesn't surprise Castro Cunha.

"Brazil is trading at a 14-per-cent discount to global equities on consensus industry-adjusted 12-month forward, price-earnings (P/E) multiples," he points out. "Higher perceived sustainable growth should encourage investors - it is trading at six-per-cent and three-per-cent discount to China and India, respectively, based on consensus-forward price-earnings (P/E) ratios."

What portion of one's portfolio should be placed outside Canada? Clearly this depends on an individual's risk tolerance, but investment firm Edward Jones recommends between 25 per cent and 35 per cent.

"In our view, global mutual funds with broad exposure to developed and emerging equity markets are a good choice since they have the flexibility to select investments that remain undervalued and to shift their holdings in response to changing opportunities," it says.

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