Should you invest in Brazil

Investing in Brazil: Opportunity or Risk?

Brazil is certainly not at the top of the priority list of investors right now. Despite all the problems, opportunity-oriented investors should take a closer look at Brazil.

2013 was a very sobering year for both the Brazilian stock market and the local currency. The leading index Bovespa fell by 15 percent. The national currency, the real, lost 14 percent against the US dollar. The real lost 20 percent of its value against the euro. This did not fit into the plan of the Brazilian government at all, as it wants to show itself from its best side, especially economically, this year for the soccer World Cup.

Numerous investors withdrew their money from the country in 2013. The national central bank's recently released data shows that more than $ 12 billion left the country. This is mainly due to the tightening of US monetary policy. Since US bond rates rose again, investors have turned their backs on Brazil. Another problem facing the Brazilian economy is high inflation, which is slowing down consumption. For this reason, the central bank raised the key interest rate to ten percent at the end of 2013. However, this rate hike could stifle investments, as companies have to pay higher interest payments for borrowed capital, which in turn diminishes profits.

The most populous state in South America also offers investors sustainable arguments in favor of investing in the Sugar Loaf. Even after the decline, economic growth of 2.2 percent is still well above the expansion rates of gross domestic product in European countries. The middle class has grown rapidly and comprises almost 95 million consumers with 50 percent of the population. This should give a sustained boost to domestic consumption. International companies in particular want to take advantage of this emerging market. For example, the German carmakers have invested heavily in their Brazilian locations in recent months in order to avoid the high customs duties.

In addition, Brazil has large reserves of raw materials that guarantee a long-term energy supply. This year's soccer World Cup and the 2016 Olympic Games are likely to accelerate economic growth again.

What conclusion can be drawn for investors? For opportunity-oriented, opportunistic investors, Brazil certainly offers good investment opportunities after the price slump. Of course, this involves certain risks. Interesting are Brazilian government bonds denominated in real terms, which, in addition to the high interest coupons, can enable additional currency gains.

Manuel Pfeiffer


You might also be interested in our article Celebrating the investment comeback with Brazil ETFs and in the ETF search you will also find a list of Brazil ETFs and a list of emerging market ETFs.

Please register for our free ETF newsletter.