Brazil - Investing Ideas?

See also Marben's writeup here: http://www.stockopedia.co.uk/content/notes-from-brazil-34112/

The FT reports that Brazil's central bank cut interest rates late Wednesday from 12.5 to 12.0%:

Central bankers around the world must be looking at Brazil with mixed emotions. The Central Bank of Brazil’s policy interest rate cut – from 12.5 to 12 per cent – inspires admiration, fear and jealousy...

The Bovespa has responded accordingly, gaining 6% since Monday, after a steep fall in August.

Mark

Just read a rather interesting article, that could be highly significant both for Brazil watchers and oil company investors:

(Reuters) - Brazil's government is racing to forge a deal in Congress this week that it hopes will prevent a lengthy legal and political battle over its huge offshore oil reserves...

 

...At stake is Brazil's plan to become one of the world's largest suppliers of oil outside of OPEC and to ensure revenue to finance improvements in infrastructure, health programs and education, which are crucial to entering the ranks of developed nations.

The final outcome will have major implications for state oil company Petrobras (PETR4.SA)(PBR.N), and possibly for multinational energy companies such as Italy's (ENI.MI) and Norway's Norsk Hydro (NHY.OL), who have expressed interest in helping Brazil develop the fields.

So far Brazil is pumping only a small fraction of the subsalt fields and requires tens of billions of dollars to develop the remaining reserves.

An agreement on distributing oil revenues is needed for the government to go ahead with a planned auction next year for the rights to develop the vast oil fields.

The so-called subsalt region is believed to hold more than 50 billion barrels of oil buried under a thick layer of salt...

Presumably this may affect £BG. ? Securing the benefit of oil revenues, without deterring investors, to fund the national issues indicated (esp. education) is crucial to Brazil's long term future. Also, delays in bringing these mega-projects on-stream would negatively affect the long term supply/demand balance, leading to higher oil prices. I will see what I can glean about the politics from my contact...

Cheers,

Mark

I have now communicated with my Brazilian contact. It appears that the situation is less concerning than I had understood form the article. Fiscal terms with oil companies are fixed. This is simply an internal debate about how the "spoils" should be distributed, so shouldn't impact investment/development of the fields. It's all somewhat academic at present anyway, as it will be some time before oil companies are making profits from the pre-salt fields!

Mark

http://www.fool.co.uk/news/investing/2011/10/04/the-buys-from-brazil.aspx?source=ufwflwlnk0000001

Brief but interesting read.

There's an interesting development reported in in the FT today: http://www.ft.com/cms/s/0/f16f5546-3c7f-11e1-8d38-00144feabdc0.html

Brazil’s state development bank has announced billions of dollars in incentives to boost the country’s sugar ethanol industry.

The move comes only days after the US scrapped import tariffs on foreign producers of the biofuel...

...Unica calculates that Brazil will need to increase the area of sugarcane plantations from 9m hectares currently to 15m in order to meet domestic demand and its target for exports to the US of 15bn litres by 2020...

Brazil has the some of the most favourable climatic conditions in the world for sugar cane production - possibly the only place where bioethanol makes economic sense. Most vehicles are "dual fuel" and motorists in Brazil choose whether to fill up with petrol or ethanol on a day to day basis, according to prevailing prices. The US tariff reduction (if sustained) finally makes exports viable.

15bn litres = 94mmbbls (but a litreof ethanol has around 30% less energy content than a litre of petrol) - so maybe equivalent to ~180mbopd of oil production.

Most significantly, has positive implications for employment in sugarcane production (including for self-employed small scale farmers) which should offer some boost to the local economy, where unemployment remains too high.

Cheers,

Mark

Looks like the Brazilian economy is shifting into higher gear this year: http://www.ft.com/cms/s/0/6c3e54f6-4870-11e1-941c-00144feabdc0.html

Brazil’s unemployment rate plunged to a record low of 4.7 per cent in December, highlighting the strength of the labour market in Latin America’s largest economy...

...The government is predicting the economy will recover to grow 4.5 per cent this year in spite of a slight contraction in growth in the three months to September.

The potential for resurgent inflation remains a concern, however.

The BOVESPA is off to a flying start, so far this year, after a poor year in 2011. I started the year with £JPB being one of my largest holdings, but have trimmed back slightly on strong gains, just to rebalance my porty a bit, in line with my asset allocation strategy. The holding still remains one of my larger ones.

A very different picture from that in the UK and Europe, yet the market is on a P/E of just 11.

In Q3 2011 Brazil overtook the UK as the worlds sixth largest economy, mainly due to the economic conditions in europe but also because brazil has been steadily been growing on its own merits and can now boast to be the largest economy in south america. Although brazil,s growth has fallen slightly in the last two quarters its headline rate is still amongst the top five globally.

Brazil Growth Chart - And future Forecast *

* Source IMF

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9205775/Swimming-naked-in-Brazils-bubbly-waters.html

I noticed this feature on Brazil in this week's Investors Chronicle:

http://www.investorschronicle.co.uk/2012/08/23/funds-and-etfs/the-big-theme/invest-in-a-top-economy-of-the-future-uC48jeigOM5TcV0XCunGVJ/article.html

Mentions many of the investment trusts and ETFs that invest in Brazil and Latin America.

"Green shoots" reported in this article: http://www.ft.com/cms/s/0/167d777e-f23c-11e1-bba3-00144feabdc0.html

Brazil’s economy has begun showing signs recently of a nascent recovery following an uptick in the central bank’s forward indicator of gross domestic product growth and better retail sales and unemployment figures.

However, external factors (US, Eurozone, China) could threaten this - so I'm "proceeding with caution".

The recent collapse in iron ore prices will certainly crimp Vale's profits.

Cheers,

Mark

Indeed,the shocking fall in iron ore prices means the likes of Vale will take a bath.
Could be the opportunity ,in any short term market sell off, to buy some quality assets on the cheap however.

Am keeping an eye on JPB as my Brazil exposure proxy.