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 I have just read an interesting book called "Emerging Markets" published by the Economist. It is aimed at companies considering doing business in emerging markets and covers topics such as political risks, interpreting economic indicators and dealing with corruption and crime. Unfortunately Brazil is only treated in passing as the authors concentrate on Eastern Europe and Russia.
This is a pity because foreign companies have been investing in Brazil for over a century and have amassed vast experience on how to remain profitable in the midst of crisis and instability. Despite this, there is still great ignorance abroad about the business environment here. By coincidence, while reading this book, I was contacted for a quote by a journalist from The Times of London who was writing an article on whether private investors should invest in Brazil's booming stock market. My advice was that the foreign investor need not be afraid of the Brazilian stock market but should be aware of the pitfalls, of which there are many. Always remember Tom Jobim's advice: Brazil is not for beginners. One reason for investing here is that you can make a lot of money and that is why practically every big multinational has operations in Brazil. A point which is constantly stressed in the Economist book is that emerging markets can be more profitable than developed markets. The book points out that Coca-Cola's share price soared by 3,500% between 1981 and 1997 as the company almost quintupled in size mainly because of "bold" investments in emerging economies. It also quotes the packaging company Tetra Pak as saying that Brazil is its most profitable market, followed by Russia. One quote from the European finance manager of an American consumer goods company sums up the investor's mercenary approach: "In the West we aim for an average profit margin of 6-7%. In central Europe we aim for and achieve 9-14%. In Russia we aim for and achieve 17-20%." This may seem rather glib if not smug but it does reflect the bottom-line expectation of an investor who wants a bigger return for the money invested. A statement like this also has to be seen in context since a return of this size is not a realistic short-term prospect. The book points out that the most successful companies are those which have taken a long-term view and not been distracted by short-term setbacks. However, what is the position with the individual investor who just wants to buy shares on the Brazilian stock market and sell them for a profit without waiting five or ten years? In this case, timing is everything and impressive short-term gains can be made but only for those who are well briefed and are prepared to take the risk. Good Years ... Investors who have bought shares in Brazilian companies in recent years have done well. Since President Luiz Inácio Lula da Silva assumed office in 2003, the stock exchange, known as the Bovespa, has more than tripled in value. In his first year in office it rose by around 97%, followed by increases of around 18% in 2004 and 28% in 2005. At the time of writing, the Bovespa index has just broken through the 41,000 points barrier for the second time this year and is 23% higher than 12 months ago. Many observers think this upward trend will continue into 2007 as interest rates continue to fall and tightly-controlled inflation boost domestic demand and, in turn, company profits. This has not gone unnoticed abroad and Brazilian stocks are becoming popular once again. In October 2006, a net total of 1.43 billion reais (around US$ 666.3 million) was invested in the Brazilian stock market as international investors bought shares worth 18.3 billion reais and sold shares worth 16.9 billion reais. According to Bloomberg, this was the biggest inflow since January. In an article published on November 5, 2006, headed "Brazil back in vogue for investors", the Sunday Times of London quoted a fund manager as saying: "We are keen on Brazil at present. About 7% of our active portfolio is in Brazil, even though it makes up only about 0.3% of the world's stock markets." The Motley Fool site published an enthusiastic piece just after Lula was re-elected on October 29. The writer, Will Frankenhoff, takes a broad overview: "Brazil is experiencing political stability and relatively consistent economic policies that had been sadly lacking in the past. "After all, it was only in 1985 that Brazil emerged from 21 years of military rule, and there have been quite a few rough patches - economically and politically - since then (remember the devaluation of the real in 1999 or the seemingly endless waves of corruption scandals that have tainted governments?). "The fruits of this stability and consistency are reflected in the economy, which is expected to expand around 3.2% this year and a further 3.5% next year, according to a survey by the Brazilian Central Bank. While these numbers represent a downgrade from previous estimates due to the effect of a strong real on exports (not to mention worker absences during the World Cup), they are likely to prove conservative in the face of aggressive rate cuts by the Central Bank." Another broad approach is taken by analyst Neil Murray in a comment published on the Canoe Network Money site on March 7, 2006: "If you compare the five year difference in annual returns between Brazilian stocks and the US or Canadian stocks, it is clear that despite its economic woes, foreign investors have been more than compensated for the perceived level of higher risk in Brazil." ...and Bad Years This enthusiasm may well be justified by the current state of the Brazilian economy but if you were to look back you would see that these impressive recent results followed three years of losses in 2000, 2001 and 2002 when the Bovespa fell by 11%, 11% and 17% respectively. And if you were to look back just one year you would see that the Bovespa rose by 151% - 151.9% to be exact - in 1999. This gives you an idea of the kind of territory you are entering. Therefore it is important for the investor to take this historical background into consideration. The current good results could be overturned by some external or internal event, such as higher oil prices on the international market or a fresh domestic scandal. Look, for example, at how the Brazilian airline business has turned upside down since the largest carrier went broke this year and two smaller companies have now grabbed the bulk of the market. Good advice came from an investment adviser quoted by the Sunday Times who said: "The prognosis for Brazil undoubtedly looks positive, but it remains a high-risk, specialist area. It's always easy to decide when to invest in a country like Brazil, but much harder to decide when to get out, which is why I would advise individual investors to opt for a fund rather than to try to go it alone." Local Factors The foreign investor should also get to know the peculiarities of the Brazilian market. For example, a number of Brazilian companies are still controlled by family groups through a system of voting and non-voting shares. These companies are efficient and run by professional management but the family is still in the background running the board of directors. Corporate feuding is common, as we have seen recently with some telecommunications companies which have led to long complicated court cases in several jurisdictions, including New York and London. The government still owns several large listed companies and interferes in their running for political reasons. São Paulo may be one of the biggest cities in the world but the business world is small and there are frequent allegations of insider trading. This happened recently when a big food company made an unsuccessful attempt to take over another in Brazil's first hostile takeover. Share prices go up and down at rates which could frighten investors in more stable markets. These domestic factors can be made worse by nervousness over external events which can spread to Brazil and have an adverse effect. This was the case when the collapse of the Argentinean economy spread to Brazil as nervous foreign investors failed to differentiate between the two countries. If, despite all this, you are still keen then it is relatively easy for the smaller investor to play the Brazilian market. If you live here then you just need to contact your bank which will either have its own brokerage - corretora in Portuguese - or put you in touch with one. Otherwise you can contact a brokerage yourself through the Bovespa site which lists those accredited. Most brokerages now offer on-line services and useful research material written by their analysts. There are also dozens of newspapers, magazines, news agencies, sites, radio and television programs devoted to financial and economic matters so there is no shortage of information. Most companies now have investor relations departments with updated sites. The Bovespa offers the chance to buy shares in companies covering a wide range of areas including high tech, telecommunications, utilities, water treatment, mining, steel, food processing, petroleum, banking, chemicals, petrochemicals, pulp and paper, footwear and many others. The Bovespa also has a parallel market called the "Novo Mercado" which lists shares in companies with greater transparency and corporate governance practices which go beyond the legal minimum. If you do not live in Brazil you can buy "proxy" shares in multinationals which do a lot of business and make much of their profits from Brazil, such as the big car makers, food and drink companies, and financial institutions. If you want a more direct involvement then you can buy shares of those companies which trade as American Depositary Receipts (ADRs) on the New York Stock Exchange. Some companies also trade on the Latibex of the Madrid Stock Exchange which handles South American companies. You can also buy into a fund managed by a foreign or Brazilian institutions. Some of these invest in general emerging market funds but others are more specific. There are also now some BRIC funds which invest in the BRIC countries i.e. Brazil, Russia, India and China. The Sunday Times article gives several contacts. Closing Points In closing, it is worth making a couple of points. Firstly, people who make money on stock markets are generally those who are ahead of the pack. If everyone is clambering to get on board then maybe it is time to get off. Remember how John D. Rockefeller decided it was time to liquidate his Wall Street holdings in October 1929 when he was given a share tip by his shoe-shine boy. Secondly, it is worth recalling that, despite the opportunities at their feet, most Brazilians do not buy shares but put their savings into safer investments, generally government bonds.
Notes: 1. I have no official connection with the Bovespa, nor do I own shares in any company traded on it. This article is not meant to be an inducement to readers to invest in any of the companies traded on it. For this reason I have not mentioned any company by name. 2. The book "Emerging Markets: Lessons for business success and the outlook for different markets" by Nenad Pacek and Daniel Thorniley is published by The Economist/Profile Books, London 2004. John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site www.brazilpoliticalcomment.com.br. He can be contacted at
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. © John Fitzpatrick 2006
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- The World Stock Markets bottomed in March 2003. Since then ALL Stock Markets are up sharply and ALL Stock Markets from developing nations are BOOMING ! Therefore even if a goat would had been elected, the Bovespa would have gone up anyway !
Curious that the reporter starts from 1985, then nothing, on purpose, until 1999 !!!!
There is a big hole.....in between and big problems in Brazil ! Problems in your currencies....not in your actual currency....which did not exist ......yet !
In 1986 You issued a new currency : the Cruzado taking 3 zeroes from the previous currency, the (first) Cruzeiro Novo
In 1989 You issued the Cruzado Novo, taking 3 zeroes from the Cruzado
in 1990 You issued the Cruzeiro, but no change in value, just in the name
in 1993 You issued the Cruzeiro Real, taking 3 zeroes from the Cruzeiro
in 1994 You issued your actual Real, dividing by 2,75 the Crueziro Real
Therefore even starting with 1 currency unit in 1986 omitting what it replaced, it became the equivalent of 0,001 in 1989, then 0,000001 by 1993 and then 0,00000036 by 2004 !!!!!!
As you can see someone would need 2'750'000.- 1986 currency to have the equivalent of 1 actual Real ! Great isnt it ?
But still Worse : the actual Real currency was issued in 1994 at the exchange rate of 1 Real to 1 US$. By 1998 the Real started to loose value and went down to 0,25 US centsin 2002.
And by now it is 1 Reais per 0,47 US cents. Or still more than 50 % below what it was
at the time the Real was issued. The funny thing is that every Brazilian businessman now finds the Real overvalued despite it has been and still is a weak currency against the US$ currency....itself a weak currency since 2002 !!!!!! Laugh......laugh....laugh......
For the exercise, I remind you that BETWEEN 1942-1994 Brazil changed "only" 8 times their currency, and withdrew 3 zeroes FIVE TIMES AND DIVIDED IT ONCE BY A FACTOR OF 2,75 !
Conclusion : one would need hundreds of trillions (yessss....) of 1he 1941 currency named REIS to equal 1 actual Real !!!!!
Probably close to another world record !!!!!!!!!!!
Then guess why with so much inflation, multi national companies NEED to have a higher profit margin than in developped countries. For years....prices INCREASED DAILY IN BRAZIL ! YESSSSSS.....DAILY !