GOLDMAN SACHS: IGNORE BRAZIL AT YOUR OWN PERIL
Goldman Sachs believes Brazil is in the long-term sweet spot in terms of economic competitiveness. In addition to a young and rapidly expanding population, Brazil is at the heart of the commodity boom and is likely to see massive injections of government stimulus as they prepare for the 2014 World Cup and the 2016 Summer Olympics in Rio (see here for more on the implications of Brazil’s Olympic win). In addition to these strong fundamental growth drivers, Goldman also says valuations and risks in Brazil remain relatively low in comparison to other markets:
Forward valuations suggest it is hazardous to be underweight Brazil. Brazilian sovereign risk and interest rates are at or near record lows, while prospects for sustainable economic growth are possibly better than at any period in the last few decades.
Goldmans says the Brazilian Bovespa equity market could jump 30% to 85,000 by 2010. Options traders have also exhibited some recent bullishness in Brazilian shares. Goldman recently said their favorite markets heading into earnings season were the BRIC markets as they continue to favor heavy exposure to emerging markets over developed markets:
We favor exposure to Brazil, Russia, India and China (BRICs) over developed markets given the significantly higher GDP growth outlook. We believe investors should use this basket to identify stocks with high exposure to emerging market growth. Long/short investors should consider buying this basket against the S&P 500 to gain exposure to higher growth in the BRICs countries versus slower growth in developed regions.
Goldman isn’t the only big bank with a heavy overweight towards Brazil and emerging markets. We recently quoted JP Morgan who made similar statements with regards to Brazil and emerging markets:
The new EM trade. Emerging economies are exiting the crisis relatively unscathed and with improved economic, financial, and fiscal positions versus developed economies. This means medium-term outperformance of their equities, currencies, and credit. Near term, it means their local debt will likely underperform, except for the highest-yielding markets, which should benefit from the search for yield. With much of the EM growth impetus emanating from commodity-hungry China, this should be bullish for commodities.
It is very hard to find holes in this argument. If I were a long-term investor I’d likely have Brazil at the very top of my investment list….
I’ve said the same thing for the last three years. Everyone is interested in China but frankly with all of the problems that China has including pollution, fresh water aquifers declining and so on, it’s more likely to be the “1990′s Japan”. Brazil has done it smart by not importing oil with it’s ethanol programs allowing them to build up their own industries.