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Like most other markets, Brazil has been battered by the credit crisis – the BOVESPA index is currently down 28% in October alone and no less than 52% from its peak as recently as May. It now appears to represent excellent value, with a historic Price/Earnings (P/E) ratio of only7.0.

But are Brazil’s prospects good enough to justify investing there?

Brazil was included in the “BRIC” (Brazil, Russia, India and China) group of rapidly emerging markets that Goldman Sachs Group Inc. (NYSE:GS) created in 2003. At that time the country didn’t deserve the distinction. Long-term growth since the 1970s had averaged less than 2% per capita, and the country had barely avoided bankruptcy in 2002. Every time the world had experienced a credit crunch, Brazil had been caught up in it, chiefly because of the country’s enormous international debt load.

Brazil got lucky. First, socialist President Luis Inacio “Lula” da Silva proved to be surprisingly moderate, not much to the left, economically, of previous Brazilian governments, perfectly willing to welcome foreign investment and generally friendly to the United States. Also, in 2003, energy and commodity prices began their long climb as part of a worldwide commodities rally that saw prices peak at astronomical levels earlier this year.

Since Brazil was not an oil exporter, there was no one single source of new wealth that the government could seize. Instead, revenue flowed to mining companies, the oil company Petroleo Brasileiro SA, better-known as Petrobras (ADR: PBR), and numerous agri-business operations that benefited from the rise in agricultural prices. It didn’t hurt at all when in November 2007 Petrobras discovered about 36 billion barrels of oil in an offshore Brazilian field.

Even Brazil’s ethanol program, which had been a hopeless boondoggle for a generation since it started during the oil crisis of 1979-82, suddenly became the envy of the world, as rising oil prices made Brazilian sugarcane the world’s cheapest and most economically and ecologically efficient source of newly fashionable ethanol. With oil prices down in the $20-a-barrel range, the ethanol-from-sugar program was a typical example of misguided Third World government planning. But at $140 a barrel, it was a bonanza.

Even at $60 a barrel, it is still a useful diversification from petroleum.

Brazil’s debt position improved after 2002 in three ways:

• The outstanding amount of debt has been reduced through modest repayments.
• Its ratio to gross domestic product (GDP) has dropped sharply, as GDP in dollar terms has shot up with the revaluation of the Brazilian real against the dollar.
• And its interest costs have dropped with Brazil’s improving creditworthiness and the generally low level of global interest rates.

Brazil’s ascension to “investment grade” status in spring 2008 appeared to cement the improvement in place; its public sector debt to GDP ratio in June 2008 was around 40%, lower than Britain’s, for example.

The financial crisis and economic downturn of 2008 has made life more difficult for Brazil. Oil and other commodity prices have sharply declined, reducing the value of Brazil’s exports. The real has declined over 30% against the dollar, increasing Brazil’s foreign debt, which is mostly dollar-denominated.

The Brazilian stock market’s decline will undoubtedly have a substantial negative wealth effect, making it more difficult for Brazilian entrepreneurs to finance new projects. On the other hand, a forecast by The Economist has Brazil still growing at 4.6% in 2008 and 3.4% in 2009, with consumer prices rising 6.0%. The Central Bank of Brazil has a good grip on inflation, with its Selic short-term rate at no less than 13.75%, while it is injecting funds into the banking system to battle the global liquidity shortage.

With continued economic growth, modest inflation, and stock prices at bargain levels for U.S. investors, Brazil is well worth considering. There are more than 30 Brazilian companies with full American Depository Receipt (ADR) listings on the New York Stock Exchange, plus 40 to 50 more traded on the over-the-counter market.  A few attractive examples you might want to look include:

Banco Itau Holding Financeira SA (ADR:ITU). This stock features a Price/Earnings There are three large banks listed on the New York Stock Exchange: The other two are the other two are Banco Bradesco SA (ADR: BBD) and Uniao Bancos Brasile SA (Unibanco) (ADR: UBB). However, Itau is the cheapest of the three, though only slightly.

Companhia Vale do Rio Doce, now referred to only as Vale (ADR: RIO). This is one of the true global blue chips. It has a market capitalization of almost $56 billion, and its stock has fallen by fully 75% since May. It is an iron-ore company with ancillary operations in gold, nickel, copper and other metals, and its shares are trading about four times projected 2008 earnings. The stock features a 5.0% yield. As one of the world’s low cost producers of iron ore, it should bounce back once conditions become more clear.

Petroleo Brasileiro SA, better known as Petrobras (ADR: PBR). Petrobras is one of the few emerging market oil companies with access to modern technology and willingness to work with the oil majors. Down by 60% in the last five months, the stock’s prospective P/E ratio is now only 5.5. It has a dividend yield of 1.3%. Petrobras remains a fairly low cost oil producer, since its production comes from conventional, albeit offshore sources.

Companhia de Saneamento Basico, also known as Sabesp (ADR: SBS). This is the water-and-sewage system for Sao Paulo. Now that’s a growth business, and is one that’s not dependent on commodity prices or on rapid Brazilian economic growth. The shares feature a P/E ratio of only 3.1 and a yield of 8.0%. This one must surely be a bargain; it has very little dependency on the economy.

Votorantim Celulose e Papel SA (ADR: VCP). This is a pulp-and-paper company, with a prospective P/E ratio of 6.0 and a dividend yield of 9.5%. Trees grow fast in the tropics; VCP benefits from that!

Finally, you should consider the Brazilian ETF, the iShares MSCI Brazil Fund (NYSE: EWZ). The fund was more than $5 billion in size at Sept. 30, and currently trades at a P/E of about 7.0 with a dividend yield of 3.0%.

As I said, Brazilian stocks are currently in the bargain-basement category, and well worth a look.

PS. Andrew Gordon at Investor’s Daily Edge recently said that Brazil was well placed to weather the current financial crisis. Read why Brazil is the best of the BRICs here.

Source: Six Profit Plays From South of the Equator

In fact, a big reason why Brazilian stocks have dropped is because the country’s central bank has been forced to raise rates to curb inflation. Policymakers have raised the benchmark rate twice since April, to 12.25%. Of course, inflation isn’t a problem unique to Brazil.

Inflation in India has been at alarmingly high levels since the first week of June, when it jumped from 8.75% to 11%. And many analysts expect government data released today (Friday) will show wholesale prices soared to a 13-year high of 11.75% in the week ended June 28.

China’s consumer price index (CPI), the nation’s primary gauge of inflation, increased 7.7% in May, after hitting a near 12-year high of 8.7% in February, and is expected to rise 7.2% year-over-year in 2008.

The European Central Bank raised its key interest rate a quarter point last week, after inflation hit a 16-year high of 4% last month, and U.S. Federal Reserve Chairman Ben S. Bernanke has also struck a more hawkish tone with regards to tightening monetary policy.

Brazil, said yesterday that its benchmark IPCA inflation rate rose 6.06% in the past 12 months, higher than the central bank’s 4.5% target, but still below the spiraling rates of China and India, and only marginally higher than inflation in the European Union. Today’s inflation rate is also a marked improvement over the 12% Brazil clocked in 2002.

Also, unlike the United States and Europe, which are both grappling with sluggish growth as well as soaring inflation, the Brazilian economy is expected to expand by a bullish 4.8% this year. And there are two big reasons why.

Brazil’s Booming Consumer Class

By 2030 an additional 2 billion people will have joined the global middle class, according to research by Goldman Sachs Group Inc. (GS). That’s a third of the world’s population and enough to cause a “shift in spending power towards middle-income economies.” With its rapid growth and abundance of resources, Brazil figures to be a major focal point of that shift.

In the past two years, more than 23 million people have leapt from Brazil’s lower income classes into “Class C,” which is defined by households with incomes between $450 and $745 a month. Class C, Brazil’s middle class, now makes up about 46% of the country’s population, according to Reuters.

The percentage of the population that makes up the lowest two classes, “Class D” and “Class E,” dropped from 51% to 39% from 2005 to 2007.

This shift has caused a boom in consumerism throughout the region. Household consumption rose 6.6% in the first quarter of this year, according to the nation’s statistics agency.

While the majority of incomes have traditionally been spent on staples such as food, an increase in household wealth has resulted in a surge in spending on luxury goods. Sales of big-ticket items, like cars, homes appliances and electronics, have jumped 80% since 2005, according to Forbes. Brazil has also become the fifth largest cosmetics consumer in the world.

Domestic demand has also been fueled by an increase in credit. The number of credit cards in Brazil rose 91% between 2002 and 2006, to 79 million, or one for every 2.3 people. And consumer loans, excluding credit cards, are expected to grow by 25% this year after soaring 40% in the first quarter, Erico Ferreira, president of the National Association of Credit, Financing, and Investment Institutions told Bloomberg News.

The surge in spending helped Brazil’s services industry, which accounts for about 60% of the economy, to grow 5% in the first quarter. Increased demand also boosted manufacturing by 6.9%, and agriculture, which now accounts for less than 10% of gross domestic product (GDP), grew 2.4%.

“Brazilians don’t get scared by 6% inflation,” Ferreira told Bloomberg. “Companies want to profit from the growing economy and they know that to do so they need to offer longer maturities at lower rates.”

Brazil Makes Some New Friends

Another big reason investors should keep believing in Brazil is that it has made some powerful new friends abroad.

Brazil’s resources are highly coveted by other emerging markets, particularly fellow BRIC country China, who is desperately seeking fuel for its own economic expansion. Brazil sent 6.7% of its goods to China last year, double the level of 2001.

Trade volume between China and Brazil totaled $29.7 billion in 2007, jumping 46.4% year-over-year, according to the latest statistics of China’s Ministry of Commerce.

Perhaps that’s why the Brazilian government has launched its “China Agenda” program, which involves a series of coordinated measures by the government and private sectors to triple Brazil’s exports to China and encourage more Chinese investment in Brazil.

According to Xinhua, Brazil wants to triple its exports to China from $10.75 billion in 2007 to $30 billion by 2010.

The Brazilian government has identified 619 products that are in high demand in China as priority export items to the country. Meanwhile, the government has also proposed to include more manufactured products in its exports to China, 74% of which now are low-value commodities such as soybeans and pig iron.

Brazil has also sought out stronger ties with Middle Eastern powers. Most recently, plans were made to establish a permanent commercial center in the United Arab Emirates to promote investment between the regions. The U.A.E. is home to the Abu Dhabi

Investment Authority, or ADIA, a sovereign wealth fund with an estimated $875 billion in assets. Brazil is the world’s sixth-largest economy and home to an internal market of approximately 190 million consumers.

Skyrocketing oil prices are having a negative effect on Brazil though – stocks fell for the first time in three days today on fears that oil prices would cause inflation, stifling growth. Brazil’s industrial output also caused worries, rising by ‘only’ 2.4% in May, compared with 10% in April.

Banco Bradesco Banking on Continued Brazilian Growth with 350 New Offices

Mike Caggeso

With incomes rising all over Brazil, Banco Bradesco SA (ADR: BBD), the country’s largest private bank, plans to add 350 new offices throughout the country in the next year and a half.

In an interview with Bloomberg, Banco Bradesco Chief Executive Marcio Cypriano said the retail expansion is a bid to sustain the bank’s staggering 30% annual profit growth.

“It’s possible to maintain the profit growth as long as we can boost our client base,” Cypriano said. “We need to grow our network to reach these people that are earning more.”

As of now, the bank has 3,160 branches, 21% fewer than Brazil’s largest bank, state-owned Banco do Brasil SA, Bloomberg reported.

Banco Bradesco’s mortgage lending nearly doubled between 2006 and 2007, from $1.32 billion (2.12 billion reals) to $2.5 billion (4.09 billion reals), and Cyriano said he expects $3.7 billion (6 billion reals) in mortgages this year.

Other income streams will be generated from expanding marketing efforts of its other business, such as insurance, brokerages and credit cards, Bloomberg reported.

Of course, each bank’s growth prospects wouldn’t be possible without Brazil’s overall economic performance and potential. Recently, the country posted a blistering 5.8% first quarter growth, its 18th consecutive quarterly gain and fastest rate of growth since 1995.

That doesn’t mean it will be easy for Banco Bradesco to keep profit growing at the same 30% pace it has been.

Walking the line between curbing inflation and promoting growth is tough for every emerging economy. Central banks often fight inflation by raising interest rates, but that pinches commercial banks because real estate is one of the first market that contracts in the face of steeper lending policy.

All things considered, Cypriano is optimistic.

“It’s difficult to say what’s the trend for return looking forward but I would say it’s more likely to remain stable,” he said.

Safe From U.S. Woes

Investors shouldn’t worry because, if anything, controlling growth is a good problem to have.

Secondly, Brazil is far enough removed from the sagging U.S. economy because South America as a whole has strong energy, mining, financial and agriculture industries, making them less reliant on U.S. imports.

Last year, Brazil’s main stock market index, Bovespa Holding SA, rose 71% – even faster than India’s.

And on Feb. 20, Brazil displaced China to become the world’s biggest emerging market, according to a key index – the Morgan Stanley Capital International Global Emerging Markets (MSCI GEM).

That shift will likely attract billions in new money to Brazilian stocks, especially from money managers who benchmark their portfolios against the MSCI GEM index.

The bottom line: Expect money to flood Brazilian shares, says Keith Fitz-Gerald, Investment Director for Money Morning.

“Anytime a country moves to the top of that index there’s a strong re-indexing effect,” Fitz-Gerald said. “And that will lead to billions of dollars of institutional money being shifted as those professional investors rebalance their portfolios. They’re going to move substantial amounts of money into Brazilian stocks.”

Source: Banco Bradesco Banking on Continued Brazilian Growth with 350 New Offices

In pretty short order, all the charge-card companies boost his credit limits, cut the interest rates he’s paying on his outstanding balances, offer him new credit lines – and even make him eligible for various “rewards” programs that give him all sorts of freebies for spending money.

Brazil finds itself in that situation because uber-debt-rater Standard & Poor’s just boosted the country’s credit rating to “investment grade” in recent weeks, moving its rating from BB+ to BBB-. Why should we care? After all, isn’t Brazilian debt bought mostly by institutional investors? That’s true. But with the increased debt rating, Brazilian shares also should benefit – provided the government doesn’t embark on a big spending binge.

Brazil was included in the “BRIC” (Brazil, Russia, India, China) group of rapidly growing emerging economies that was created by Goldman Sachs Group Inc. (GS) back in 2003. At that time, it really didn’t deserve the distinction. Long-term growth since the 1970s had averaged less than 2% per capita, and the country had narrowly avoided bankruptcy only the year before. Long-term interest rates were above 20% (around 15% in real terms), which hardly encouraged companies to make capital-spending commitments that might grow the economy. Most alarming, a left wing socialist named Luis Inacio Lula da Silva had just been elected president.

Brazil got lucky. First, Lula proved to be surprisingly moderate, not much to the left economically of previous Brazilian governments, perfectly willing to welcome foreign investment, generally friendly to the United States and not at all like his socialist neighbor, Venezuelan President Hugo Chavez. Second – and probably even more importantly – 2003 was the year in which energy and commodity prices began the long climb that has brought them to their current (astronomical) record levels. Third, since Brazil was not an oil exporter, there was no single source of new wealth that the government could just seize. Instead, revenue flowed to mining companies, the oil company Petroleo Brasileiro SA (usually referred to as just Petrobras) (ADR: PBR), and numerous agri-business operations that benefited from the rise in agricultural prices.

Most startlingly, Brazil’s ethanol program, which had been a hopeless boondoggle for a generation since it started during the oil crisis of 1979-82, suddenly became the envy of the world. Rising oil prices made Brazilian sugarcane the world’s cheapest and most economically and ecologically efficient source of newly fashionable ethanol. At a $20 per barrel oil price, the ethanol-from-sugar program was a typical example of misguided Third World government planning; at $120, it is a bonanza.

Brazil’s debt position has improved in three ways:

• The amount of outstanding debt has been reduced through modest repayments.
• Its ratio of debt to gross domestic product (GDP) has dropped sharply, as GDP in dollar terms has shot up with the revaluation of the Brazilian real against the dollar.
• And Brazil’s interest costs have dropped along with the country’s improving creditworthiness and with the generally low level of global interest rates.

With more income, a stronger currency and lower debt, it’s not surprising that Brazil’s credit rating has improved. As with an individual consumer on whom the credit card gods suddenly smile, what happens next depends on what use is made of the improved position. If a person reverts to their earlier spendthrift ways, they will quickly max out the new credit limits, actually making their position even worse than before.

Fortunately, the Brazilian government appears to have learned the difficult lessons of the last 25 years, and is remaining both careful in its spending and welcoming to foreign investment. That will bring down Brazil’s debt costs further, as will recent favorable developments like the discovery by Petrobras of about 36 billion barrels of oil in an offshore Brazilian oilfield.

Now, don’t get carried away. This isn’t China – with its 10% annual growth rate, apparently repeatable ad infinitum. Brazil had such growth rates for a brief period in the 1970s, but they disappeared around 1980 in a blizzard of unpaid debt. Brazil’s growth rate is currently around 5% – but it looks far more balanced and stable than it did in the 1970s. Brazil’s improving credit position is likely to make growth persist, and future political risk appears minimal. When Lula goes, a politician of the center-right could well replace him.

Another good sign for Brazil – there are more than 30 Brazilian companies with full American Depository Receipt (ADR) listings on the New York Stock Exchange, plus 40-50 more that are traded in the over-the-counter market. Here are a few attractive examples to consider:

Banco Itau Holding Financeira SA, referred to usually as Banco Itau (ADR: ITU), has a Price/Earnings ratio of 14 and dividend yield of 2.4%.  Brazilian banks earn very high returns, primarily from domestic market lending in reals. Including Banco Itau, there are three large ones listed on the Big Board in New York; the other two are Banco Bradesco SA (ADR: BBD) and Uniao Bancos Brasile SA (Unibanco) (ADR: UBB). However, Itau is the cheapest of the three, though only slightly.

Companhia Vale do Rio Doce, now referred to only as Vale (ADR: RIO), is one of the true global blue chips, with a market capitalization of almost $200 billion. An iron-ore company with ancillary operations in gold, nickel, copper and other metals, its shares trade at a reasonably valued 13 times earnings, though its dividend yield is only 1.2%.

Petrobras (ADR: PBR) is one of the few emerging market oil companies with access to modern technology – and the willingness to work with the oil majors. Its shares are up 168% in the past year, but the stock’s P/E still is only 16. It has a 1.3% yield. The possible upside: It finds another gigantic offshore oilfield. The possible downside: Oil drops back to $50 a barrel. If the world’s monetary authorities get serious about imposing higher interest rates to fight inflation, PBR and RIO would probably suffer as commodities prices fall back to earth.

Companhia de Saneamento Basico (Sabesp) (ADR: SBS) is the water and sewage system provider for Sao Paulo. Now that’s a growth business, and not dependent on commodity prices. With a P/E of only 9.2 and a yield of 2.7%, this is one stock I have to say I love.

TNE (ADR: TNE) There are a bunch of Brazilian cell phone companies, but TNE appears to be the cheapest. It’s concentrated in the populous southeast and northeast regions of Brazil, with a P/E ratio of only 7 and yield of 4.25%.

Telecomunicacoes de Sao Paulo SA, or Telesp (ADR: TSP) provides the fixed line telephone system for Sao Paulo. Before you sneer, consider this: the company has a dividend yield of 9.8% and a P/E ratio of 10 (which means the dividend is only just covered). And it’s majority owned by Spain’s Telefonica.

Voturantim Cellulose (ADR: VCP) is a pulp and paper company, with a P/E ratio of 14 and a dividend yield of 2.8%. Trees grow fast in the tropics and VCP definitely benefits from that!

Source: Is Brazil ‘Investment Grade’ for Investor’s Money, Too?

With main indices down significantly since Jan. 1, a slew of companies – including many financial firms – recently (and gladly) offered to share how much they pocketed from their stake in Visa’s IPO:

• Bank of Hawaii Corp. (BOH) said its net income would jump by $7 million to $9 million in the first quarter, much of which will come from a mandatory redemption of its Visa stock, the Star Bulletin reported.

• National City Corp. (NCC) said it would post a $450 million cash gain from selling about one third of its stake in Visa, BusinessWeek reported.

• West Virginia’s City Holding Co. (CHCO) banked $2.3 million from a partial redemption of its Visa holdings.

• Overseas, federally owned Banco de Brasil took in $207 million from selling a portion of its Visa stakes. Its private sector rival Banco Bradesco (BBD) made $201 million from Visa’s IPO. Both figures are before tax, Business News Americas reported.

• South African bank FirstRand said last week that it received a pre-tax gain of $123 million from its shareholding in Visa, iAfrica reported. Of that, $69 million was from the sale of its Visa’s shares and $54 million is the value of the remaining shares. FirstRand is locked into holding those remaining shares for three years.

• Melbourne-based Australia and New Zealand Banking (ANZBY) reported that it expects to pocket $350 million pre-tax from 50% to 60% of its shares in Visa. Follow Aussie banks National Australia Bank and Westpac are expected to turn a $200 million and $100 million profit, respectively, The Age reported.

• And in China, China Life Insurance (LFC) sunk $300 million into Visa’s IPO. Assuming it bought its shares at Visa’s opening price of $44 a share, that investment is now worth more than $439.5 million at Friday’s $64.46 closing price. Also, China Investment Corp. – the country’s $200 billion sovereign wealth fund – made an undisclosed investment in Visa’s IPO, Today’s Financial News reported.

“It’s not standard practice to say it, but typically big institutions do if they are part of the IPO process and receive allocation,” said Money Morning Investment Director Keith Fitz-Gerald.

Still a Buy?

For its March 19 IPO, Visa’s 406 million shares were originally priced at $44 each – well above the expected price range of $37 to $42 a share. The $17.86 billion proceeds it took in made it the biggest U.S. public offering, shattering the $10.6 billion AT&T Wireless raised in its April 2000 IPO.

Globally, only one deal was larger: The October 2006 IPO of the Industrial & Commercial Bank of China, or ICBC, which raised $19.1 billion – or nearly $22 billion when the over-allotment provisions were fulfilled.

However, $44 was the price underwriters and large-scale investors got in at.

Visa’s shares opened at $59.50 on the New York Stock Exchange (NYX), and traded as high as $65, before closing at $56.50, up $12.50 a share, or 28.41%. The following day, shares jumped another 13.89%.

The initial run-up and continued growth gives the San Francisco-based Visa a market value of more than $52 billion.

And shareholders are still piling on – despite companies publicly declaring they are cashing out – because of Visa’s dominant market position and the growing shift into electronic payments.

“Visa’s CEO has got it together,” Fitz-Gerald said. “He’s targeting Chinese growth and that should go right to the bottom line.”

As far investing in the company, Fitz-Gerald suggests buying in increments to capture safest gains.

“I wouldn’t jump all in now, but there is long term value.”