Trading Signals 05/02 – 09/02
The Brazilian Economy: Investment Opportunities
Brazil is a country with a rich cultural heritage, stunning beaches, renowned carnivals, and dizzying economic potential. This is why it stands out as one of the most attractive places for investment.
Being the largest country in both territory and population in Latin America, Brazil boasts a robust and diverse economy due to its various industries and sectors, such as automotive, electronics, medical, and others.
Furthermore, Brazil is a key exporter of agricultural products like coffee, soybeans, and meat. This factor contributes to the country’s resilient and reliable economy for investors seeking to allocate resources into successful and emerging markets.
Brazil possesses advanced infrastructure, modern technologies, and skilled workforce. These factors provide investors with a high degree of confidence in choosing to invest in Brazil’s economy.
In Brazil, there is one of the most investor-friendly climates for foreign investors. Non-resident investors, both individuals and legal entities, can invest in most financial instruments and capital market instruments available to resident investors without any restrictions. However, non-resident investors are required to engage local organizations to fulfill the roles of custodian and representative for regulatory and taxation matters. Investors are also obligated to complete other formalities, such as registration with the Brazilian Central Bank, the Securities and Exchange Commission (CVM), and the Federal Tax Service.
Why Invest in Brazil?
Incredible Development Potential — Brazil is the largest economy in Latin America, boasting immense potential for investments across various sectors of the economy.
Economic Stability — Brazil maintains a stable economy, providing foreign investors with more predictable investment conditions.
Diverse Investment Opportunities — Brazil offers opportunities for investments in various industries, including agriculture, tourism, energy, oil, and gas extraction.
Vast Domestic Market — With one of the world’s largest domestic markets, Brazil presents foreign companies with substantial opportunities to expand their businesses and increase profits.
Political Stability — Brazil enjoys political stability, a crucial factor for predictable investment conditions and risk mitigation.
Large-scale Investment Programs — Brazil is implementing extensive investment programs across different sectors, presenting attractive opportunities for foreign investors.
Robust Banking Sector — The Brazilian banking sector has extensive experience working with foreign investors and provides a wide range of financial services.
In Brazil, there is one of the most complex stock exchanges called BM&F Bovespa, which was established in 2008 through the merger of the Brazilian Mercantile and Futures Exchange (BM&F) and the São Paulo Stock Exchange (Bovespa). The São Paulo Stock Exchange was founded in 1890. The integrated BM&F Bovespa offers a multitude of trading products, including stocks, ETFs, futures, commodities, forwards, options, corporate and government bonds, and more.
Around 450 companies are listed on Bovespa. All trading of stocks and derivative financial instruments takes place on the Bovespa through the electronic trading platform called Megabolsa, which is order-driven. The second-largest stock exchange in Brazil is the Rio de Janeiro Stock Exchange (BVRJ), which trades government bonds and currencies.
Trading Mechanism at BM&F Bovespa
All buy and sell transactions of stocks are processed electronically through Megabolsa. The exchange offers a “home broker” service that allows orders to be placed via the internet trading platforms provided by exchange brokers. Additionally, the exchange offers Direct Market Access (DMA) through participating brokers, allowing both individual and institutional investors to place orders directly within the Megabolsa trading system.
The Megabolsa order book is structured based on the priority of price and time. The presence of market makers is not mandatory; however, certain stocks have designated market makers who are required to be present in the market consistently, placing bid and ask prices for a specific volume of securities.
Funds and Securities
External investors can invest in core stocks of well-known Brazilian companies by investing in American Depositary Receipts (ADRs) listed on U.S. stock exchanges and Global Depositary Receipts (GDRs) listed on European markets. In 2008, the global Forbes 2000 list included 34 Brazilian companies, many of which are traded on U.S. stock exchanges in the form of ADRs. All ADRs are denominated in dollars and are subject to regulations by the U.S. Securities and Exchange Commission (SEC). Another popular investment method is through Exchange-Traded Funds (ETFs), aiming to provide access to indices based on Brazilian stocks.
In the future, we can expect to see a swift increase in the number of ETFs based on Brazilian stocks. One of the most well-known Brazilian ETFs is the iShares MSCI Brazil Index Fund (NYSE: EWZ), traded on the American Stock Exchange (Amex), which tracks stocks in the MSCI Brazil Index, covering approximately 85% of the total market capitalization. EWZ focuses on the largest Brazilian companies, representing nearly 75% of its presence in the three most promising sectors of the Brazilian economy: commodities, energy, and finance. There is also the iShares MSCI Brazil ETF traded on the London Stock Exchange (LSE).
For investors interested in smaller Brazilian companies, there is the VanEck Brazil Small Cap ETF (NYSE: BRF), which invests in companies generating at least half of their revenue from sales to Brazilians. Another notable ETF is the WisdomTree Dreyfus Brazilian Real Fund (NYSE: BZF), aiming to provide returns generated by Brazilian money market rates as well as the movement of the Brazilian currency, the real, against the U.S. dollar.
Several ETFs offer exposure to a range of Latin American countries alongside Brazil, such as the iShares S&P Latin America 40 Index Fund (NYSE: ILF), which allocates about 60% of its investments to Brazil. There are also numerous mutual funds that provide varying degrees of exposure to Brazil along with other Latin American countries. For instance, the DWS Latin America Equity Fund (SLANX) has a participation share in Brazil of around 70%. The Fidelity Latin America Fund (FLATAX) invests approximately 59% of its holdings in Brazil alongside other Latin American countries.
Much like other developing economies, Brazil appears to be well-positioned for potential growth opportunities. Engaging in direct investment within Brazil requires adherence to the country’s regulatory procedures. Alternatively, the offshore investment route offers avenues for investing in Brazilian stocks through mechanisms such as ADRs, GDRs, mutual funds, and globally available ETFs. The array of investment possibilities in emerging markets seems to be broadening steadily. It would be advisable to conduct thorough research prior to committing to any specific investment avenue.