Invest in Brazil as the country gets set for growth

It’s time to invest in Brazil as the economic powerhouse looks set to profit from the two key trends of the next 20 years: the global energy transition and population growth, says James McKeigue.

It’s time to invest in Brazil, after last Sunday’s election win for Luiz Inácio Lula da Silva – “Lula” – the socialist candidate running for the presidency. 

The country will benefit from the two major themes driving the world economy over the next two decades: the energy transition and global population growth.

Where to invest in Brazil

What excites me is the country’s booming export sector. 

Put simply, Brazil makes what the world needs. And as our world is upended by the energy transition and rapid population growth, demand for Brazil’s goods will soar. 

The world can’t fight climate change without Brazil. As pressure grows to slow global warming, more money will flow into the country. Its main asset is the Amazon rainforest, which is home to more biodiversity than anywhere else on the planet. A healthy Amazon rainforest would act as the planet’s lungs, absorbing huge quantities of CO2 and releasing fresh oxygen. 

Under Bolsonaro, deforestation increased, which led some scientists to worry that fires in the rainforest were releasing more CO2 than it could capture. Lula has a proven record of combatting deforestation when he was last president and international donors such as Norway have already announced plans to resume funding Amazon projects. 

Brazil’s next globally-significant climate-change asset is its mining industry. That might seem to contradict the previous paragraph, but Brazil’s iron ore and nickel are essential for the energy transition. Brazil has the world’s fourth-largest reserves of nickel – a metal that is used in electric-vehicle (EV) batteries

At present the main use of nickel is stainless steel, as adding it to the mix helps make steel more resistant to extreme temperatures and corrosion, while batteries account for just 6% of overall demand for nickel. But financial data group S&P Global expects that to reach 35% by 2030 as electric-vehicle production jumps. 

Invest in Brazil: a commodity powerhouse 

Brazil is well established as an agricultural superpower; the country’s food production supplies 10% of the world’s population. It is the world’s largest exporter of beef, soybeans, sugar and coffee. It is also very near the top in corn, cotton and pork. Depending on how it is measured, agribusiness now accounts for 25% of the Brazilian economy. 

The US Census Bureau estimates that the world population will hit eight billion in mid-November 2022. That will grow to almost ten billion by 2050 and 11.2 billion by 2100. Over the same period, an increase in extreme weather owing to climate change will adversely affect farming. 

Of course, Brazil isn’t the world’s only breadbasket, but recent conflicts have shown that it is one of the most reliable. 

Similar dynamics apply to energy. Brazil is the largest oil producer in Latin America and its production has climbed to three million barrels per day, from two million in 2012. Consultant McKinsey believes it could reach almost four million barrels per day by 2035. 

Linked to both energy and food is Brazil’s biofuel production. Brazil is the world’s second-largest producer and consumer of biofuels. That was led by the sugar industry in the 1970s, but now modern biofuels can use a much wider range of feedstock, such as plant waste, dead animals and used vegetable oil. As the technology improves Brazil will be able to extract ever more value from its agricultural waste products. 

Despite the country’s growing success, its stockmarket still looks attractive on a price/earnings (p/e) ratio of just seven compared with the MSCI Emerging Markets average of ten. That’s one of the most compelling reasons to invest in Brazil. 

How to invest in Brazil today 

Brazil’s national oil company, Petrobras (NYSE: PBR) has achieved record profits by divesting non-core businesses and concentrating on oil and gas production in recent years. It is likely that Lula will put pressure on the company to invest in more clean-energy ventures, which will be less profitable. 

Nevertheless, other oil majors, such as BP and Shell, have already invested a far greater share of profits in renewable projects with less market backlash.

Petrobras has ten billion barrels of reserves and is likely to add more over the next few years as it continues to exploit its pre-salt discoveries. 

Petrobras is extremely cheap, trading on a price/ earnings (p/e) ratio of just 2.8, compared with five for Shell and BP. It also pays a mega-dividend yield of almost 50%

Agriculture accounts for around 27% of Brazilian GDP, yet agribusiness stocks make up just 4% of the local stockmarket. Fortunately, there are a few US-listed options that we can invest in. Adecoagro (NYSE: AGRO) is a South American agricultural giant whose offerings include rice, wheat, corn and dairy products across Argentina, Uruguay and Brazil. 

However, the bulk of the business is its Brazilian sugar and ethanol operation, which accounts for 50% of sales and 70% of earnings before interest, taxes, depreciation and amortisation (Ebitda). Its biofuel production makes it an important part of the renewable energy story, while its food output is essential for a growing world population. 

Another option is BrasilAgro (NYSE: LND), which produces beef, cotton, soy, sugar, ethanol and corn in Brazil, Bolivia and Paraguay. More than 80% of its land is in Brazil and soybeans comprise the bulk of its production. On a p/e ratio of 4.5 the company is a cheap way to buy into the long-term global food trend.

If you don’t fancy the risk of investing in individual shares, then the cheapest way to invest in Brazil is through an exchange-traded-fund (ETF). 

With a total expense ratio (TER) of 0.74%, the iShares MSCI Brazil Ucits ETF (LSE: IBZL) offers a low-cost way to gain exposure to a diversified basket of Brazilian stocks.

If you prefer an actively managed Brazil fund, there are several available to UK investors. One to consider is HSBC Brazil Equity, which has a total expense ratio of 1.28% per year.

Remember to get your tickets for the MoneyWeek Wealth Summit hosted by Merryn Somerset Webb, on 25 November 2022! – we’ve got some brilliant speakers lined up and, given everything that’s going on, we’ll have an awful lot to talk about.

Book your place now at moneyweekwealthsummit.co.uk

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