(By Tim - iStockAnalyst Writer) Yesterday the major Brazilian stock index, Bovespa Sao Paulo, fell to a new 3 year low and closed 60% below the 52 week high reached in May 2008. U.S. investors holding Brazilian stocks as either ADRs or the Brazil focused ETF EWZ have faired even worse due to the steep decline of the Brazilian Real. I see several reasons for the big sell off in Brazilian stocks:
- Fears a global recession will hit emerging market countries hardest. Much of Brazil's economy is commodity and export driven.
- The lumping of Brazil into the BRIC (Brazil, Russia, India, China) conglomerate for foreign investing purposes. As investors shun all of these markets as a group they are taken down equally despite any differences.
- The bursting commodity bubble has hit Brazil hard. A large portion of the country's exports are commodities and falling prices have caused the stocks to tumble.
- Strengthening dollar and weaker Real. The Real has fallen over 30% against the dollar in recent weeks causing further damage to share prices in U.S. dollar terms.
Although the above items have caused significant damage to Brazilian share prices, they may be reaching support levels soon and an aggressive investor could pick up some tremendous values in Brazil. I believe that Brazil has two primary positives that will generate long term profits for investors from this point. First, Brazil has lots of potential for internal growth. Many basic businesses that are a saturation levels in the U.S. are just starting to grow in Brazil. From basics such as household electricity to modern conveniences like high speed Internet access and advanced banking services. Mortgages to buy homes are still a fairly new idea in Brazil. Second, many of Brazil's commodity producers are low cost profitable companies even at the current commodity prices and will only benefit as the global economy turns around.
For investors, the easiest way to invest in Brazil is through the iShares MSCI Brazil Index Fund (EWZ).
EWZ is currently 70% off its 52 week high and top holding include national oil company Petrobras (PBR), mining giant Vale (RIO), banks Banco Bradesco (BBD) and Banco Itau ITU), beverage distributor Ambev (ABV) and steel makers Siderurgica Nacional (SID) and Gerdau S.A. (GGB).
EWZ recorded its last down year in 2002, returning a negative 34%. From 2003 to 2007 the ETF returned an average of 62% per year.
Besides the individual stocks listed above, here are a few more Brazilian companies that trade as ADRs and have interesting prospects. These are companies that will continue grow with the internal growth of the Brazilian economy:
- Power companies Copel (ELP) and CPFL Energia S.A.(CPL) CPL
- Homebuilder Gafisa S.A. (GFA)
- Cable, phone and broadband providers Tele Norte Leste Participacoes S.A. (TNE) and Net Servicos de Comunicacao (NETC)
- Water and sewage service provider Companhia de Saneamento Basico do Estado de Sao Paulo (SBS)
If you are interested in any of these stocks or IWZ I highly recommend you do your own research and wait for a definite turn in the global markets. Today's (10/28) markets seem to be signaling good things but watch for a developing trend. I believe that many solid growth companies are severely undervalued after the recent market crash, but investors are often reluctant to come back after a fall. Of the stock listed above the ones that I find most interesting are SID, CPL and TNE.
