Brazilian Stocks In 2009

Sam Hopkins
updated | Author's Website

One country is gaining a head of steam to deliver huge gains in 2009.

Don’t let tame year-end trading fool you… Brazil is about to break out.

On any given day, you probably hear more about the three other countries in the BRIC group of top emerging markets-Russia, India, and China-than you do about Brazil.

But within just the past couple of months, we’ve seen these headlines coming out of Latin America’s top economy:

  • “Brazil’s Lula Calls for Shake-up of Global Finance”
  • “France Backs Brazil for Security Council Seat”
  • “Brazil as a New Kind of Oil Giant”

They didn’t get much play, but these news stories have big consequences for the global economic leadership and investors who want to maximize international stock gains.

Brazilian Strength in 2009

First off, you must understand that as a nation, Brazilians have known terrible times. Military dictatorship and economic stagnation are recent memories for even the most prosperous in that sunny country, and there are still tens of millions of Brazilians who live on less than $1 a day.

Horrible handling of money affairs also put Brazil under the financial planning eye of the International Monetary Fund. In order to ensure repayment of loans issued by the World Bank, the IMF sends experts to countries like Brazil. They impose austerity in public spending and tamp down inflation by limiting wage increases, which often draws the ire of labor unions and non-governmental organizations.

In recent years, though, developed countries that used to preach responsible accounting to Brazil have fallen on their faces in a flurry of tricky accounting maneuvers.

Brazil notices, and President Luiz Inacio Lula da Silva is rightly pointing out the irony that Brazil is now an island of financial stability.

“Important banks – very important banks – that spent their lives giving advice about Brazil and what we should or shouldn’t do are now broke,” Lula told a rally in southern Brazil in September.

“Brazil is more prepared than any country in the world,” to deal with the new global economic landscape, Lula added. “Brazil has been preparing for some time to become a solid economy.”

Indeed, Brazil shows better signs of having bottomed than the U.S. Since October 27, the iShares MSCI Brazil Index ETF (EWZ) has gained over 8%, while the S&P 500 (^GSPC) is down by nearly 2%.

That’s a solid stock market reflection of the Brazilian consistency that more and more world leaders are latching onto.

As early as 2004, then-Secretary of State Colin Powell said that Brazil was a “serious candidate” for a permanent seat on the UN Security Council.

Now, French President Nicolas Sarkozy is using his final month in the European Union’s rotating presidency to endorse Brazil as a UNSC fixture.

Sarkozy spoke unequivocally of his backing for the world’s fifth most-populous country to open an EU-Brazil summit on December 22:

“We need Brazil as a permanent member of the Security Council,” Sarkozy told the gathering.

Sarkozy also tethered EU financial policy to Brazil’s, pledging to take a common policy approach to this coming April’s G20 meeting of finance ministers and leaders of top global economies.

“We decided to narrow our positions and arrive in London with a common vision, on the future role of the IMF, the system of management of financial institutions,” Sarkozy said.

Part of the French Prez’s reason for cozying up to Lula has to be energy…

“Pro-Alcohol” and the Brazilian Energy Advantage

Brazil is the world’s top producer of sugarcane ethanol, which is far more efficient than the corn-based variety most known in North America, and can be produced for only $1 per gallon.

Again, Brazil’s advantage today stems from tough times in past decades-Brazil began its Pro-Alcohol program to create a nationwide fleet of flex-fuel cars in the 1970s. Shaky international oil markets and few strings to pull with producers meant Brazil had to figure out an alternative. Starting with crop science a generation ago, the tropical country’s bountiful sugar resources now power cleaner vehicles driven by millions of newly prosperous citizens.

Sugarcane biofuel now contributes more than hydroelectricity to Brazil’s energy mix, and the country’s official National Energy Balance study for 2007 said that 46.4% of Brazil’s energy that year came from renewable sources.

That’s nearly 9 times the average clean energy contribution for the 30-country OECD, which is only 5.2%

So Lula is taking things a step further, lobbying Sarkozy and his European peers to make Brazil and other emerging countries top international suppliers of biofuel.

Bullish on Brazilian Biofuel Expansion

“We do not want European countries to dismantle their agricultural structure in order to plant sugarcane. We want them to invest in biofuel production in impoverished countries that have land available, such as the African countries,” Lula told the International Conference on Biofuels in November.

Brazil is already engaged in the transfer of biofuel technology to African countries like Ghana.

And Lula has even brought the pressing issue of African migration to Europe into the discussion, couching Brazil’s biofuel experience in a much larger international context.

“As long as there are impoverished nations, there are also going to be nomadic people seeking better opportunities,” Lula contested.

Around 500,000 illegal immigrants enter the European Union yearly, according to official statistics.

Brazil can afford to be magnanimous and create biofuel Trans-Atlantic opportunities across the same latitude.

Though African countries may be empowered by Brazilian cooperation, it turns out that Brazil also has a potential fossil fuel bonanza just off its shores…

Petrobras Announced Major Finds in 2008

At the same conference where he offered a helping hand to Africa, Lula announced a 2 billion-barrel oil discovery. Brazil’s U.S.-listed national oil company Petrobras (NYSE:PBR) is heavily active in biofuels, acting on the government’s wishes over the years to make Brazilian cars and filling stations ethanol-friendly.

But at the end of the day, Petrobras is still Petroleo Brasileiro (Brazilian Petroleum). The company looks for oil all over Brazil, and it struck huge reserves at the deepwater Tupi and Carioca fields in 2008.

Now, those oil traps lay under miles of water and hard rock, and today’s oil prices don’t seem to justify new investment in offshore oil…

Yet we know that cratering oil prices create under-investment in the near term, which leads to lower supply and higher prices as the global economy starts to pull out of a recession. We hope for a U-shaped recovery to kick in before 2009 ends, but you can bet Petrobras will stick to its strategy.

Just as the government’s commitment to the Pro-Alcohol biofuel program put Brazil in a position of power, Petrobras investors will reap the rewards of the company’s long-term strategy.

Brazil’s steady approach is bringing it to the center of international policy circles. That means more business for Brazilian enterprises and supercharged gains for investors who tap Brazil’s new power.

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