**[investwise]** Brazil: 2010, The Year Of The Samba?

 

There are many people out there lamenting the fact that they didn't buy into booming Brazil months and even years ago. As many people are aware, you would have beat the Dow 2-to-1 over the last 12 months by investing in Brazil.   One of  the most popular Brazilian ETFs, iShares MSCI Brazil (EWZ) was up 85%, while the SPDR DJIA ETF (DIA) was up a not-too-shabby 40% in one year's time. But you are probably thinking that the Brazil stock market is partied out. Or as they say in Rio, "O Carnaval acabou."   Not so! says Rudy Martin, editor of Latin Stock Investing, one of Forbes newest partners. Rudy believes there is more partying ahead for Brazilian investors. At the beginning of this year, Martin published a report on the Brazilian Bonanza and highlighted several trends that are driving Brazil toward becoming one of the top 5 economies in our lifetime, along with China and India.   Below are five more good reasons to invest in Brazil now, excerpted from the current edition of Latin Stock Investing.   Low Earnings Multiples: The average U.S. stock sells at 17 times this year's and 15 times next year's earnings. In contrast, Brazilian stocks are selling at 12.5 times earnings, or 20% less than U.S. stocks. The average earnings increase for Brazilian stocks is 15%-20%, and that assumes no major appreciation in the Brazilian currency.Alternatively, if you believe forecasts for target prices, then there is another 20% to 40% appreciation potential for the average among the 70 stocks I track in the Latin Capital Market Stock Index. Other benchmarking methods, such as price to sales/growth and relative dividend yield, generate even higher theoretical prices. Stable Currency: The strong Brazilian currency is both a blessing and a curse. The Brazilian real currency rallied by 32% in 2009, the biggest advance among the 16 major currencies. To combat a further rise in the real, the government imposed a 2% tax on foreign capital inflows into equities and fixed-income investments. There is enough demand for this currency that the country is now running current account deficits. The Brazilian Central Bank is forecasting a 2010 current account deficit of $29 billion. Fortunately, Brazil has $243 billion in foreign exchange reserves to help exporters and the financial system deal with short-term liquidity disruptions. Reasonable Interest Rates: Let's put things in relative perspective. Obviously in the U.S., with near-zero interest rates and a highly leveraged consumer base, a double-digit interest rate would choke the economy. But we are talking about Brazil now. Five years ago, Brazil's central bank benchmark interest rate was 20%! Today rates sit at a low of 8.75%. The country's inflation rate is now over 5% and that's the highest it's been in 10 months. Prices for Brazilian exports are rising from both a stronger currency and customer demand. The 90% spike in iron ore prices clearly points out that the Brazilian economy is heating up. Expect the government to soon raise the overnight bank lending rate to discourage inflation and speculation. High Economic Growth: The IMF forecasts that Brazil's economy will grow by 4.7% this year and another 3.7% next year. Brazil was one of the economies least hit by the global financial slowdown. With the surge in commodity prices, growth estimates have risen to nearly 6%. The wealth is spreading to middle class Brazilians, but there is still a long way to go. On a per capita income basis, Brazilians still have to catch up with their richer neighbors. The IMF calculations give the average Brazilian $10,500 of income vs. $14,000 for Chileans. The OECD just invited Chile to join the list of richest nations, the first Latin American nation with the "developed" status. Yes, Brazil is still very much a developing economy, especially vs. the United States. Young people and those over 65 tend to be economically dependent or live off investments. Only 30% of the population is either less than 14 years or over 65. In contrast, in the U.S., 35% of the population is out of the 14-65 range. So in effect, the U.S. has more dependents in its economy than Brazil does. And this difference will get bigger as Americans on average live six years longer to age 78. So what do rising income and a growing population add up to? A strong Brazilian economy. A Shortage of Homes: Believe it or not, there is a housing shortage in Brazil estimated at 5.8 million, according to Brazil's Minister of Cities. There's money to be made from this real estate gap. Cyrela Brazil Realty, Brazil's largest developer, reported 2009 earnings that were 2.6 times higher than in 2008. Rudy Martin's favorite Brazilian developer, whose shares trade on the New York Stock Exchange, just raised nearly $600 million in a stock offering to take advantage of this growth opportunity. Over the last year, this stock has split and doubled!   So next time someone mentions a Brazilian bubble, remember that we have just been through the first serious correction in Brazilian stocks in the last five years. Those who had the courage to buy on dips did extremely well Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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