Investment Adventures in Emerging Markets

Order and Progress on the Rise in Brazil

My worldwide pursuit of good investing bargains takes me to some magnificent countries. In my view, Brazil is certainly among the most beautiful and economically vibrant in the western hemisphere. Its Portuguese-speaking multiracial population of almost 200 million1 represents a growing and upwardly mobile consumer market.

Brazil is the fifth most populated country in the world and is chock-full of natural resources and rich farmland. Appropriately, the country’s name comes from the wood that grows along the coast, which was greatly valued by the European textile industry as a source of deep red dye as early as the 16th century. The nation is also home to the world’s largest, most biologically diverse tropical rainforest. In addition to being home to the Amazon River, the country’s Iguazu River leads to the spectacular Iguazu Falls and the Itaipu Dam, the world’s largest hydroelectric power plant by energy production.

The country’s motto “Ordem e Progresso” (Order and Progress) is finally being realized after an economic history that hasn’t always been very orderly. Inflation, with percentages running into the thousands in the early 1990s, has recently been at about 6%.2  In 2011, economic growth was estimated to be approximately 3% and unemployment at the end of the year was about 5%.3  There is even a labor shortage in many sectors. Foreign reserves surged to $348 billion in the third quarter of 20114 and the currency, the Real, has strengthened versus the U.S. dollar since 2002. 5

Mark Mobius in Brazil
Mark Mobius in Brazil

I recently traveled to Sao Paulo, the nation’s largest city, to visit several companies we hold in our portfolios and to look for new investments. Sao Paulo is a city within a state of the same name and is the nation’s most industrialized and most important business center, representing a third of GDP.6 It features Brazil’s highest literacy and lowest infant mortality rates, and the highest GDP per capita.

A population of over 19 million also makes Sao Paulo the largest city in Latin America. All those people can make for heavy traffic congestion and, consequently, Sao Paulo boasts over 500 helicopters, the highest number in the world, as businessmen fly to reduce their travel time to meetings and conferences, as well is to their offices and homes.7

Starting in the financial sector, I visited some leading banks that exemplify Brazil’s fast expanding economy. One bank plans to open a significant number of new branches this year to provide a full range of services including asset management, insurance, wholesale banking, full retail operations, credit card and general corporate and personal lending. I also met with the executives of another of Brazil’s principal banks, which has enacted effective cost cutting and has increased efficiency to provide a full range of banking and financial services throughout all of Latin America. Emphasis in the banking sector seems to be increasingly focusing on the attractive and growing consumer market.

Among the most exciting companies I visited was one of Brazil’s car rental firms, which has expanded market share through a combination of astute marketing and clever planning. Because more people are flying, there is greater airport demand and an increase in requests from insurance companies for temporary replacement vehicles.  Both trends are also growing the business.

Another interesting visit was to a beer and soft drink producer. Brazil has the potential to benefit from an expected 14% increase in the minimum wage this year, and greater purchasing power is expected to increase beer consumption over cachaça (a local sugar cane-based alcohol) with crushed lime and sugar (I still love the caipirinha made from cachaça, though!). Beer accounts for the majority of sales, though the company I visited also bottles soft drinks and produces a popular energy drink. With millions of sales distribution points throughout Latin America, the beer line-up includes some of Brazil’s and Argentina’s largest selling brands. The company is actively preparing for Brazil’s hosting of the World Cup in 2014 and the Olympics in 2016 and making plans to ensure adequate capacity for thirsty fans and visitors.

Competition with drink producers is advancing, both from a Japanese company that acquired a local beer producer and also from a Mexican-based bottler. This advance in competition is among the key factors we take into consideration when evaluating the attractiveness of a potential investment.

Brazil also boasts its share of high-tech firms which can attract our attention, and I visited a software company that is accelerating adoption of its software. In my view, the company has a good model of corporate governance, and its revenues appear to be increasing from customer software maintenance.

As with other companies in Brazil, I learned that keeping employees is difficult, as some managers told me turnover can run as high as 25%. This is another key factor we bear in mind when evaluating Brazilian companies. Meantime, we are encouraged by the government’s commitment to supporting the growth of the software and other specialized industries through the reduction of payroll taxes.

Overall, I was very pleased with the meetings with executives from these companies and banks. I look forward to my next visit, and we continue to keep our long-term eye onBrazil, one of the world’s most exciting markets.

1 Source: Instituto Brasileiro de Geografia e Estatística. Population as of 2010.

2 EIU: 6.6% year-over-year for Nov 2011.

3 Source for economic growth: EIU estimates 2.9% for 2011. Source for unemployment rate: 4.7% as of December 2011, Trading Economics.

4 EIU: US$348 billion as of 3Q11.

5 Real exchange rate moved from the 2002-low of close to Real 4 to USD 1, to the current rate of Real 1.7 to USD 1.

6 Source: The Economist.

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