3 Ways to Profit From the Eventual Brazil Turnaround

brazil-turnaroundLatin America’s largest economy – Brazil – is struggling. Weak commodities prices, a water crisis, political intervention in the economy and the scandal surrounding state-controlled oil and gas behemoth Petrobras (NYSE: PBR) are primarily to blame.
This combination of events has pushed this once booming economy into recession.
Brazil’s gross domestic product is expected to contract by 1% to 2% in 2015, the worst recession in 25 years. And in U.S. dollar terms, the economy will contract by nearly 25%, thanks to a plunging currency. The Brazilian real is down about 50% since President Dilma Rousseff came to power in 2011.
Adding to Brazil’s woes are high interest rates. In a world of zero and negative interest rates, Brazil’s key Selic interest rate is currently sitting at an astonishing 13.75%. And for the first time since records began in 1992, Brazil’s economy actually lost jobs in April.

Stormy Conditions

Sadly, conditions in the country will get worse before they get better.
The Petrobras scandal involving massive political kickbacks is still expanding. Marcelo Odebrecht, the CEO of Odebrecht SA – Latin America’s biggest engineering, construction and infrastructure company – is now in jail. And the tentacles of the scandal look to be reaching out and entrapping other companies, such as Brazil’s largest electricity company, Electrobras (NYSE: EBR).
Then we have the politics. Despite the appointment of a solid finance minister, Joaquim Levy, President Rousseff still believes in “developmentalism.” That’s a fancy word for state intervention in the economy, such as keeping energy prices below cost and limiting returns for private companies in much-needed infrastructure projects.
It’s not surprising then that business investment has collapsed. Business confidence is at levels not seen since 1998. Unfortunately, the next presidential election in Brazil is not until 2018.

A Contrarian’s Market

But that doesn’t mean investors should completely forget about Brazil.
As pointed out by emerging markets guru Mark Mobius in his blog, the country does have some pluses:

  • Brazil is big – it has the seventh largest economy by GDP and sixth by population. Demographics are favorable, too, with the median age at 30.7 years.
  • Since 2003, 36 million people have come out of poverty and joined the middle class. Literacy is also high, at above 90%.
  • Finally, Brazil is extremely rich in natural resources. Along with the United States, it is the “breadbasket” to the world.

And let’s not forget about Mobius’ mentor, the legendary investor Sir John Templeton. He was the ultimate contrarian, who in his own words would “buy when others are despondently selling.” Templeton would no doubt be combing Brazil for bargains today.

3 Brazil Investment Picks

I don’t know what Sir John would buy if he were alive today, but here are three ideas that crossed my mind.
The first is a company involved in agriculture, Adecoagro S.A. (NYSE: AGRO), which owns farmland in Brazil, Uruguay and Argentina. It produces over 1.3 million metric tons of agricultural products, including corn, wheat, soybeans, rice, sugar and milk.
And unlike most Brazilian stocks, this year it is up about 17%. Interestingly, billionaire investor George Soros owns nearly 26 million shares of Adecoagro.
The second choice is a consumer play: Ambev S.A. (NYSE: ABEV). This company is, of course, the Brazilian subsidiary of Anheuser-Busch InBev (NYSE: BUD). This means aggressive cost-cutters 3G Capital and Jorge Paulo Lemann are involved, which is always a positive.
Ambev is the biggest brewer in Latin America, with well-known brands such as Stella Artois, Skol, Brahma and Antarctica. It is also a soft-drink giant and the largest PepsiCo (NYSE: PEP) bottler outside the United States.
Finally, for very patient investors, there is an exchange-traded fund: iShares MSCI Brazil Capped ETF (NYSE: EWZ).
This ETF has a yield in excess of 4.25%, thanks to financial stocks making up more than a third of the portfolio. These financial stocks are sure to benefit down the road when interest rates finally begin to decline in Brazil.
Brazil is not the place right now for investors looking for widespread capital gains. But patient, contrarian investors should start building positions in select opportunities now for the eventual Brazil turnaround.

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