Big Profits in Brazil

There’s something strange going on in Brazil. You might call it a “schizophrenic economy.” Brazil is an economy of two halves. From the outside looking in, it’s a former star player plagued by socialist leaders with no understanding of free-market principles. But from the inside looking out, it’s a booming emerging market with record low jobless numbers, a strong currency, and high interest rates to keep the economy from overheating.

Although GDP slowed to a crawl of just 0.9% last year (hardly too enticing), it is difficult to find a Brazilian who even notices. More Brazilians have jobs than ever before. Wages are rising. The government is riding high in the polls. And Brazilians are shopping… eating out… and drinking out at a pace that makes London and New York look sleepy by comparison.

In fact, during my trip to São Paolo earlier this year, business contacts there kept telling me how hard it is to hire in Brazil because of the booming economy and jobs market.

If you need convincing, take a taxi ride down Rua Colômbia, a street that does nothing but sell top-end luxury autos— Rolls Royce, Ferrari, Bugati, Porsche, Maserati, Jaguar, Lamborghini, BMW, and Mercedes-Benz. I have never seen anything like it—not in Europe, not in North America, and not even in emerging Asia.

Try to book a table at a restaurant in the trendy Vila Madalena and Jardins neighborhoods, and you are likely to get a polite “no.”

Brazil is not without problems, as you’ll know if you’ve visited the place. There is still plenty of poverty, corruption, and bureaucratic mismanagement. But that’s precisely what makes Brazil an emerging market, rather than a mature economy.

As I always make sure to stress to people who are considering investing in emerging markets, these places are not for the faint of heart. They have frequent changes in leadership, high rates of poverty, illiteracy, and political corruption and mismanagement. But this is precisely why they offer the greatest opportunity.

The important question to ask when investing in one of these markets is whether the government can fulfill its promise of a better future for its citizens. If it can, emerging markets have a good chance of one day becoming developed nations.

Brazil has a lot in its favor. It is a mature democracy. It has a big, young population. It has huge natural resource reserves. And it has few money-draining military or foreign-policy intentions. Debt-to-GDP levels are low. And interest rates are high, which encourages savings and capital formation. Is it out of favor? Yes. Is it out of growth? Not likely.

A certain company there is a contrarian investor’s dream right now. An $11 billion utility, with growing earnings per share, it’s in the bottom 20% of the market on a price-to-earnings basis. But the dividend yield this stock throws off is in the top 20% of the market. That means you stand to profit as P/E multiples expand, since investors pay more for each dollar of earnings as sentiment toward Brazil improves. You also stand to profit as you cash the company’s yearly dividend checks.

The third source of profits will be growing earnings per share. This company is the perfect play on a better future for Brazil. It produces power. So, all else being equal, the more power usage there is, the more earnings it will produce—and the more each share will be worth in terms of underlying earnings.

Editor’s note: Every month, International Living’s finance editor, Chris Hunter, brings you his recommendations of the best untapped investment opportunities in the global market.

He reveals the name of the power company mentioned in this postcard in the current issue of International Living magazine—and you’ll get instant access to the story when you subscribe.

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