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Why Would You Want to Invest Offshore in Brazil?

Not that long ago Brazil was touted as one of the BRICs nations. Along with Russia, India, and China and it seemed destined to join the ranks of the most developed and prosperous economies within just a decade or two. Brazil was considered a model for developing nations as employment soared, poverty was reduced, and safety net social programs helped stabilize their society. Then prices for oil and other commodities collapsed. Much of this had to do with China importing less as well. Nevertheless, Brazil was not equipped to moderate its social programs. And, on top of that, investigators uncovered corruption at the highest levels of the socialist government. And, Brazil entered an economic decline rivaling that of the Great Depression. So, why would you want to invest offshore in Brazil today?

 

Why would you want to invest offshore in Brazil today? A new conservative government along a partial recovery of oil market are good reasons.

70 Years of Crude Oil Prices

 

Source: Macro Trends

This graph of 70 years of oil prices shows the fall from $111 oil in June of 2014 to oil selling for less than $40 by the end of the year. As income from oil and other commodity exports fell, Brazil’s economy went into decline from which it is just now starting to recover. The reason to consider investment in Brazil today has to with the new conservative government. It will be friendlier to and more closely allied with the USA, and more open for foreign investment.

US Relations with Brazil

Senator Marco Rubio wrote a piece published on the CNN website. Rubio says the US should go big on Brazil.

On New Year’s Day, President Jair Bolsonaro was inaugurated in Brazil, ushering in a new era in Brazilian politics that marks a dramatic departure from the leftist, anti-American governments of Luiz Inácio Lula da Silva and Dilma Rousseff. The new Bolsonaro government has already indicated it seeks an even closer security and economic relationship with the United States.

The senator notes that closer cooperation in areas from space exploration to protection of intellectual property rights are already in the works. Foreign direct investment is likely to increase in Brazil as investors see a government friendlier to foreign investment.

Direct Foreign Investment in Brazil

The World Bank tracks direct foreign investment year by year and country by country. Brazil took a hit after commodities fell in 2014 and the situation there was compounded by social and political turmoil.

 

Why would you want to invest offshore in Brazil today? A graph from Deloitte shows recent and predicted investment.

Foreign Direct Investment in Brazil

 

Source: Deloitte

So, why would you want to invest offshore in Brazil based on this data? We have often commented that a good investment strategy is to follow the smart money. Folks with billions of dollars to invest have the resources to spot and take advantage of emerging investment opportunities. Financial services and the food and beverage industry are favorites of many investors.  As the graph shows, direct foreign investment bottomed out in 2018 and is expected to rise in the coming years.

How Could You Invest in Brazil?

We assume that you do not have a few billion dollars laying around for investment purposes and that you probably do not speak Portuguese or have an English speaking stock broker ready to pick up the phone in São Paulo and place your orders on the Bovespa stock exchange. But, in order to invest in companies in Brazil, you can buy American Depositary Receipts in the USA. These instruments trade in the USA and level 3 ADRs are subject to the same reporting requirement as US companies.

Investopedia discusses American Depositary Receipts.

American Depositary Receipts (ADRs) are stocks that trade in the U.S. but represent a specified number of shares in a foreign corporation. Like regular stocks, ADRs are bought and sold on U.S. markets. They also trade in U.S. dollars and clear through U.S. settlement systems allowing ADR investors to avoid transacting in a foreign currency. 

The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost-effective way to buy shares in a foreign company. They save money by reducing administrative costs and avoiding foreign taxes on each transaction. Foreign entities like ADRs because they allow non-U.S. companies to gain more U.S. exposure, allowing them to tap into the wealthy U.S. equities markets.

There are companies in Brazil that list as ADRs on US exchanges. You can find a complete list of Brazilian ADRs at TopForeignStocks.com. Twenty-eight of these are listed on the New York Stock Exchange and are subject to NYSE financial disclosure requirements. There are also 45 that trade over the counter and provide less financial information.

The stocks in the NYSE list include the aerospace and defense company, Embraer, several large banks, a number of electric companies in a country where hydroelectric power is dominant, and Petroleo Brasileiro-Petrobras, the Brazilian oil and gas giant.

The trick will be to determine which of these will be the most likely to prosper as Brazil’s economy improves. Using the financial information provided for level 3 ADRs, investors will be able to do their own fundamental analysis of these stocks.

Investment in Brazil and Monetary Exchange Rates

If you do not invest directly in Brazil you will not need to convert US dollars to the Brazilian real (currently = 27 cents). However, the valuation of ADRs will be affected by the exchange rate. As a point of reference, a real was worth 44 cents before oil took a nosedive in 2014 and has been as low as 24 cents. As such the currency seems to have bottomed out and will likely appreciate in value versus the dollar as US interest rates level off and the Brazilian economy surges.

Brazil Selling Off Assets of State Owned Companies

An interesting bit of news from NASDAQ is that in order to reduce their national debt, Brazil is looking at selling assets of several of its state-owned companies. These include subsidiaries of the state oil company, banks, and insurance companies. Those interested in investing in Brazil during its economic recovery may want to watch this story as they search for buying opportunities.

Why Would You Want to Invest Offshore in Brazil PPT





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