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Brazil is Set for An End-of-Year Economic Samba… Here’s How to Join The Dance

Brazil is Set for An End-of-Year Economic Samba… Here’s How to Join The Dance

This analysis is from Martin Denholm, Senior Editor, Investment U
Monday, November 16, 2009

A GDP growth rate of 9% would be an impressive performance over the course of a year.

But it’s nothing short of outstanding over just one quarter.

Yet that’s the projected fourth quarter performance for Brazil – a country far removed from the United States both geographically and economically.

Leading the charge is a surge in domestic consumption, as optimistic Brazilians (no doubt also buoyed by the decision to award Rio the 2016 Olympic Games) pump money into the economy.

If that fourth quarter projection holds, it would provide a major shift in fortunes and a solid springboard for 2010. You see, even with that impressive 9% estimate, Brazil’s full-year GDP growth is only expected to fall between 1% and 1.5%, as the country’s struggling export market has dragged the economy down.

However, this area is also showing signs of revival. Despite a projected 22% drop this year, due to the 30% spike of the Brazilian real currency, export sales to the U.S. spiked by 20% in October.

Brazil’s Surging Popularity as a BRIC Nation

Brazil is one of the well-known BRIC nations (Brazil, Russia, India, China) and has surged in investor popularity over the past few years.

The resource-rich country (agriculture and commodities are crucial economic drivers) owes its more recent success to the fact that domestic consumers largely drive its economy, so it’s remained relatively sheltered from the worst of the global downturn. And with unemployment down and wages increasing since March, consumers are fueling the economic resurgence. So despite the struggles for Brazil’s export market this year, consider that it accounts for less than 25% of its annual GDP.

Investors are happy, too, sending the Brazilian Bovespa stock index up 71% year-to-date (as of November 12). With that performance, you might expect the market to be overvalued now. Not so. Compared to the S&P 500 and its fellow BRIC nations, it’s cheap. The Bovespa trades at 13 times 2010 earnings, significantly less than 18 for the S&P, 18.4 for India and 19 for China.

On top of that, Moody’s kicked up Brazil’s credit rating to investment grade in September.

Global investors are latching onto Brazil’s newfound strength, too. Deputy Trade Minister Welber Barral says foreign direct investment is expected to grow by 33% in 2010 – from $30 billion to $40 billion.

Here’s how to cash in on that strength yourself…

How to Benefit From Oil Market Muscle and Brazilian Strength Through One Company

Both Investment U’s commodities specialist, Lee Lowell, and energy expert, Dave Fessler, have written about the likelihood of oil prices rising to $90 and then $100 over the next 2-3 months.

You can check out the most recent updates here.

Given their bullish oil price projections and Brazil’s end-of-year strength (and continuing into 2010), one of the best ways this double rising trend is through heavyweight Brazilian oil firm, Petroleo Brasileiro – better known as Petrobras (NYSE: PBR).

As of November 12, the company’s shares had blasted past their five-year average annual return of 42%, surging to a 101% year-to-date gain. Responsible for a good chunk of that gain was the major oil discovery off the coast earlier in 2009. What’s more, it’s still trading for just 14 times earnings.

For a broader, more diversified play on Brazil, take a look at the country’s ETF – the iShares MSCI Brazil Index (NYSE: EWZ). It tracks the price and yield performance of Brazilian stocks on the Bovespa.

Best regards,

Martin Denholm

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.


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