Investing in Brazil: Time to adjust your strategy

iShares MSCI Brazil Capped Index (EWZ) vs. S&P 500 Index (SPY)
iShares MSCI Brazil Capped Index (EWZ) vs. S&P 500 Index (SPY) 2000 –

Ten years ago, investing in Brazil was as simple as buying a fund tied to the Brazilian stock market and watching it blow away the Standard & Poor’s 500.  But investors have been humbled by this strategy over the past couple of years and are seeking alternatives to earn competitive returns in Brazil.

From 2004 – 2008, Brazil’s index traded fund, EWZ, was up a staggering 350 percent while the S&P 500 was up 40 percent during the same time period. However, the EWZ subsequently tumbled 77 percent through the Feb. 13 market close.  The steep decline coincided with the central bank’s inflation-fighting campaign in which it raised interest rates to 12.5 percent by July 2011.

Since then the Brazil’s central bank has slashed interest rates to 7.25 percent. which is where they stood as of the Jan. 16 policy meeting.  The resulting inflationary pressures have reignited speculation about an interest rate hike later this year.

“Some sectors like financials targeting Brazil’s middle-class should perform well this year; however, their gains could be offset by continued poor performance in Brazil’s energy and oil sectors,” said Abby Woodham, a passive research analyst at Morningstar Inc.

This does not not mean you should not invest in Brazil.  2013 is still a big year, with the country putting the finishing touches on new infrastructure for the 2014 World Cup and 2016 Summer Olympics.  Both events should attract millions of tourists, who are expected to consume a lot of beer, among other things.

Ambev, Brazil’s largest beverage company, stands to benefit especially after a new law was passed that will enable spectators to consume beer inside the stadium during the World Cup.

The positive news comes as Ambev trades at a 52-week high of $46.84, as of Feb. 13, after reporting 52.6 percent year-over-year growth in third-quarter earnings.

“Consumption of beverages should be in good shape this year due to an expected rise in discretionary spending from Brazil’s middle-class,”  said Alan Alanis, Latin American equity research analyst at JPMorgan Chase & Co, in a note.  “Ambev’s management plans on launching some marketing campaigns in conjunction with Carnival and ahead of next year’s World Cup, which should further increase brand awareness,” he added.

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