How and Why to Invest in Brazil
Brazil is a country in transition. It is the eighth largest economy in the world but continues to climb back from a devastating recession in 2015 and 2016. President Jair Bolsonaro, elected in 2018, has made pension reform a priority.
In 2019, consulting firm A.T. Kearney removed Brazil from its list of 25 most reliable countries for foreign investment. The country had been on the list since its inception in 1998. Fitch Solutions, meanwhile, forecast gross domestic product (GDP) will reach 2.4% in 2019, up from 1.3% in 2018.
Brazil's Rich in Resources
International investors know Brazil best for its rich natural resources. In addition to its extensive offshore oil fields, the country is the second-largest producer of iron ore in the world and produces more ethanol than Asia and Europe combined. These resources helped it cheaply produce a wide variety of industrial and consumer goods while serving as a key raw material supplier to countries like China. However, economic difficulties in China have decreased need, which is taking a toll on Brazil.
The Benefits and Risks of Investing in Brazil
Like most emerging markets, investing in Brazil involves a trade-off between risk and reward. Political instability and commodity-dependence make it riskier than developed markets.
The Morgan Stanley Capital International (MSCI) Brazil Index has significantly outpaced the MSCI Emerging Markets and MSCI All Countries World Index (ACWI) year-over-year as of June 28, 2019. MSCI Brazil recorded a year-over-year performance of 39.43% growth in net returns while MSCI Emerging Markets was at 1.21% and MSCI ACWI at 5.74% for the same period.
The benefits of investing in Brazil include:
- Commodity Richness: Historically, Brazil's economic growth has benefited from strong demand for its natural resources in China and other emerging markets, although these factors have led to some significant declines in more recent years.
- Relatively Stable Economy: After taking steps towards fiscal stability and liberalizing its economy in the 1990s, Brazil has become a top-tier economy with a growing technological sector and an inward focus that should reduce commodity dependence.
- Rich in Natural Resources: Brazil is the second-largest producer of iron ore in the world and home to one of the largest offshore oil discoveries in decades. This has helped it build a base from which it can grow its internal sectors of the economy.
The risks of investing in Brazil include:
- Political Instability: Brazil has 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.
- Foreign Dependence: Brazil is more dependent on exports than developed countries like the United States, while it also relies heavily on external financing. The commodity downturn has taken a toll on the economy as a result.
The Best Ways to Invest in Brazil
Opportunities to invest in Brazil range from U.S.-listed exchange-traded funds (ETFs) to securities listed on its own stock exchange, the MB&F Bovespa. 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)
Brazil's most popular ADRs include:
- Petroleo Brasiliero 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 MB&F Bovespa. 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.
The most popular index on the MB&F Bovespa is the Bovespa Index (IBovespa). It accounts for about 80% of trading volume and 70% of the exchange's total market capitalization.