We’ve all heard the disappointing news coming from team BRIC: Brazil’s boom has slowed to a trickle with GDP growth in 2012 predicted to be just 1%. The lofty 3.1% figure previously touted by the Brazilian Central Bank turned out to be achievable, but only through some, err, inventive accounting. Brazil’s growth prospects remain uncertain, but one thing is for sure: the upcoming World Cup and Olympics Games are going to be huge drivers of infrastructure spending. This presents several significant investment opportunities. Before discussing them, let’s first take a closer look at the country’s economic climate.
Even with Brazilian Bank Itaú predicting a 1.5% boost in GDP from the World Cup alone, there is good reason to proceed with caution if you’re looking to increase your exposure to the Brazilian market in the near future. The credit-driven consumption that drove Brazil’s growth in the past decade is now slowing. Even with state-owned banks offering low interest rates, households are becoming more and more unwilling to borrow. Twenty-three percent of disposable income is now tied up servicing existing debt from purchases of things like cars, televisions, and home appliances. This is cause for concern, especially in a country where an estimated 80% of GDP is tied to consumption. That said, nearly 165 million potential consumers in the country are predicted to spend between $3 billion and $6 billion by the end of 2013.
Another source of worry is China. Brazilian commodity exports, mostly heading for China, more than doubled since 2005 and now account for 14% of GDP. But with Chinese growth rates and global commodity prices beginning to fall, Brazil’s medium and long term growth prospects are put in jeopardy.
Over the next four years, the government plans to spend R$955 billion (around US$470 billion) on 12,265 projects to improve roads, railroads, seaports, airports, stadiums as well as the country’s energy generation and distribution systems.
The important thing to realize is just how desperately Brazil’s infrastructure needs every penny.
The country that is about to host the two largest mega-events in the world is a country where 14% of roads are paved (most of them in São Paulo). It’s a country who’s infrastructure ranked 104th out of 142 countries in a World Economic Forum survey. The huge need for timely infrastructure improvements coupled with the anticipated government expenditure translates into a significant opportunity for investors.
The first thing to do is take a close look at the EGShares Brazil Infrastructure ETF, which is comprised of 30 leading companies that represent Brazil’s infrastructure sectors. The Top 10 holdings and weightings are
- Ultrapar Holdings Inc (UGPA3): 6.31%
- Basic Sanitation Company of the State of Sao Paulo (SBSP3): 5.83%
- CCR SA (CCRO3): 5.76%
- Embraer S.A. (EMBR3): 5.54%
- CESP – Cia Energetica de Sao Paulo Pfd Shs -B- (CESP6): 5.25%
- CPFL Energy SA (CPFE3): 5.09%
- BR Malls Participacoes S.A. (BRML3): 4.95%
- Tractebel Energia S.A. (TBLE3): 4.86%
- Gerdau SA (GGBR3): 4.64%
- Weg SA (WEGE3): 4.05%