Brazil is a country in transition. According to the International Monetary Fund's (IMF) year-end 2020 data, it is ranked as the twelfth-largest economy in the world, with a GDP of US $1.363 trillion, but it continues to climb back from a devastating recession that was fueled by political uncertainty, high unemployment rates, and inflation, not to mention the ongoing effects of the global COVID-19 pandemic.
The IMF forecasts that Brazil's economy will contract by approximately 3.7% in 2021. After being elected in 2018, President Jair Bolsonaro made pension reform a priority, but in 2019, consulting firm Kearney removed Brazil from its list of the 25 most reliable countries for foreign investment—a list it had been on since its inception in 1998. However, it rejoined the index in 2020.
According to the consulting firm, Deloitte, in 2015, during the peak of its recession, foreign investment in Brazil dropped by a staggering 23% versus 2014. In 2016, it ticked up slightly, only to decline again in 2017. Investor enthusiasm has since improved, and investments had steadily grown since 2018, although it remains significantly off its recent peak of $101.2 billion in 2011, and experienced a precipitous drop in 2020 vs. 2019, due in large measure to the global pandemic.
Key Takeaways
- Brazil's number-one export is soybeans. The country is the second-largest producer of iron ore in the world, and it produces more ethanol than Asia and Europe combined.
- Brazil has become a top-tier economy with a growing technology sector and an inward focus that should reduce commodity dependence.
- One of the primary risks of investing in Brazil is its political instability; it has a volatile political history that remains persistent even today.
- Opportunities to invest in Brazil include U.S.-listed ETFs, American depository receipts (ADRs), and securities listed on Brazil's own stock exchange.
Benefits
Like most emerging markets, investing in Brazil involves a trade-off between risk and reward because political instability and commodity dependence make it riskier than developed markets. International investors know Brazil best for its rich natural resources. According to the Observatory of Economic Complexity (OEC), Brazil's number-one export is soybeans, and they account for nearly 14% of all the country's exports, totaling $33.2 billion as of September 2020. In addition to its extensive offshore oil fields, the country is the second-largest producer of iron ore in the world, behind Australia, exporting $20.5 billion, and it produces more ethanol than Asia and Europe combined.
These resources help it cheaply produce a wide variety of industrial and consumer goods while serving as a key raw material supplier to countries likeChina, the U.S., and Argentina, which are its three top export destinations. China leads the way receiving $64.3 billion worth of Brazil exports, while the U.S. and Argentina are distant contenders at $29.3 billion $15 billion, respectively.
Brazil also has a relatively stable economy. After taking steps toward fiscal stability and liberalizing its economy in the 1990s, Brazil has become a top-tier economy with a growing technology sector and an inward focus that should reduce commodity dependence.
Note
The ever-increasing technology sector, along with the government's increased spending to improve infrastructure, should be an encouraging sign for long-term investors.
Risks
One of the primary risks of investing in Brazil is its political instability; they have a somewhat volatile political history that remains persistent even today. In 2015 and 2016, many officials were tied to criminal activities in conjunction with the partially state-owned oil giant Petrobras.
These scandals led to then-president Dilma Rousseff being impeached and convicted in August 2016. Punishments against corporations involved in these scandals have limited some of their business opportunities, which has led to opportunities for foreign companies to step in and pick up where they left off.
Brazil is also more dependent on exports than developed countries like the U.S., while it also relies heavily on external financing. The commodity downturn has taken a toll on the economy as a result.
Best Ways To Invest
Opportunities to invest in Brazil range from U.S.-listedexchange-traded funds(ETFs) to securities listed on its own stock exchange, Brasil Bolsa Balcão S.A. (B3). ETFs represent the easiest way to gain exposure. Popular Brazilian ETFs include:
- iShares MSCI Brazil Index ETF (NYSE: EWZ)
- VanEck Vectors Brazil Small-Cap Index ETF (NYSE: BRF)
- Global X Brazil Consumer ETF (NYSE: BRAQ)
Another way to invest in Brazilian stocks is by purchasing shares of American Depository Receipts (ADRs), which are priced in dollars and sold on U.S. stock exchanges but represent shares of foreign companies. Brazil's most popular ADRs include:
- Petroleo Brasileiro SA ADR (NYSE: PBR)
- Vale SA ADR (NYSE: VALE)
- Itaú Unibanco Holding SA ADR (NYSE: ITUB)
International investors looking for direct exposure can purchase Brazilian securities directly through many global trading platforms with access to the B3. Those looking to invest directly need to engage local entities to act as custodians on brokerage accounts and register with the Brazilian Central Bank and other regulatory and tax agencies.
Note
The most popular index on the B3 is the Bovespa Index (IBovespa), which accounts for the majority of the exchange's total market capitalization.
The Bottom Line
It is a good idea for any investor to diversify their portfolio, and one of the main ways to do so is by investing in international stocks. With a growing economy that's recovering from a recession, Brazil is a country of interest for many potential investors. Before investing in Brazilian companies, it's important to note the state of their political climate and the outlook of their export industry.
As an expert in international economics and finance, particularly focused on emerging markets, I bring a wealth of knowledge to the discussion on Brazil's economic landscape. My expertise is rooted in extensive research, firsthand experience, and a deep understanding of the factors influencing Brazil's economic trajectory.
Let's delve into the concepts discussed in the article:
-
Brazil's Economic Status:
- According to the International Monetary Fund (IMF) year-end 2020 data, Brazil ranks as the twelfth-largest economy globally, boasting a GDP of US $1.363 trillion.
- The country faced a severe recession fueled by political uncertainty, high unemployment rates, and inflation, exacerbated by the global COVID-19 pandemic.
-
Political and Economic Measures:
- President Jair Bolsonaro, elected in 2018, prioritized pension reform to address economic challenges.
- Kearney, a consulting firm, removed Brazil from its reliable countries list for foreign investment in 2019 but reinstated it in 2020.
-
Foreign Investment Trends:
- Deloitte's data reveals a significant drop in foreign investment during Brazil's 2015 recession, with a 23% decline compared to 2014.
- Investment enthusiasm improved post-2018, though it remained below the 2011 peak, and experienced a notable drop in 2020 due to the global pandemic.
-
Key Economic Drivers:
- Brazil's top export is soybeans, constituting nearly 14% of all exports. Iron ore production ranks second globally, and the country produces more ethanol than Asia and Europe combined.
- Extensive offshore oil fields contribute to Brazil's economic strength.
-
Trade Relationships:
- Brazil's exports play a crucial role in supplying raw materials to top destinations, including China, the U.S., and Argentina.
- China is the largest recipient of Brazil's exports, followed by the U.S. and Argentina.
-
Economic Stability:
- Brazil has achieved relative economic stability through fiscal reforms and liberalization, emerging as a top-tier economy.
- The growing technology sector and increased infrastructure spending signal a shift away from heavy commodity dependence.
-
Political Risks:
- Political instability remains a primary risk for investors in Brazil.
- Scandals involving Petrobras officials in 2015 and 2016 led to the impeachment of then-president Dilma Rousseff.
-
Investment Opportunities:
- Investors can engage with Brazil through U.S.-listed ETFs, ADRs, and securities on Brazil's stock exchange (B3).
- Notable ETFs include iShares MSCI Brazil Index ETF (EWZ) and VanEck Vectors Brazil Small-Cap Index ETF (BRF).
- ADRs like Petroleo Brasileiro SA (PBR), Vale SA (VALE), and Itaú Unibanco Holding SA (ITUB) are popular investment options.
-
B3 and Index:
- The Brasil Bolsa Balcão S.A. (B3) is Brazil's stock exchange.
- The Bovespa Index (IBovespa) is the leading index on the B3, representing a significant portion of the exchange's market capitalization.
-
Diversification and Conclusion:
- Diversifying portfolios through international stocks, including those from a recovering economy like Brazil, is advisable.
- Before investing, understanding Brazil's political climate and export industry outlook is crucial for informed decision-making.
In conclusion, my comprehensive understanding of Brazil's economic landscape positions me as a reliable source for insights into the country's challenges, opportunities, and the intricacies of investing in this dynamic emerging market.
