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Time To Cut The "B" From The BRIC?

Posted: Nov 25, 2008 10:24 AM by Gregory S. Davis

Tickers in this Article: BBD, RIO, PBR, ILF

Brazil, one of Latin America's and the world’s fastest growing economies, elicits shared thoughts of ethanol, iron ore and excitement over its annual carnival. Investors holding the S&P Latin America 40 Index Fund (AMEX:ILF) have another shared experience, however, derived from the pain of losing approximately 60% of their investment since the beginning of the year through November 20. Investors wondering if the long-term positive outlook for Brazil, backed by its inclusion in the BRIC acronym, is still intact should consider the following. (For more on the BRIC countries, check out What Is An Emerging Market Economy?)

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Brazil's Place In The BRIC
Brazil and Russia are considered to be the main future suppliers of natural resources for the other emerging countries in the BRIC group, namely India and China. Brazil has a large supply of natural resources like iron ore, nickel and petroleum that are critical components for the development of infrastructure and energy production.

Why Did ILF Fall 60%?
Investments in Brazilian based companies like oil producer Petroleo Brasileiro S.A. (NYSE:PBR), natural resource miner Vale Do Rio Doce (NYSE:RIO) and Brazil's largest private bank Banco Bradesco (NYSE:BBD) represented more than 25% of the ILF ETF through the end of September. Investments in Mexico and Chile help the fund diversify away from Brazil, but the funds overall concentration in Materials, Energy and Financials have been the major cause of the funds recent decline. Earlier in the year when oil was trading above $140 per barrel and the energy needs of emerging Asian markets appeared to have no end in sight the fund was riding high on the commodity upswing. The slowdown in the global economy, falling oil prices and tightening of credit requirements have all combined to push ILF's top holdings downward. (To learn more, read ETFs: How Did We Live Without Them?)

Vivo Brazil
Under the leadership of President Luiz Inacio Lula de Silva, Brazil has maintained its position as the largest national economy in Latin America according to the International Monetary Fund. Although President Luiz Inacio Lula de Silva second term of office ends in 2010 the transition to a new president is expected to be smooth and Brazil is expected to remain on the path toward eliminating poverty, adding more people to the middle class and expanding its agricultural production capabilities. Brazil is also expected to focus on cooperating with other emerging markets to foster sustainable methods for growing their respective economies. Brazil's real GDP growth rate is expected to decline from 5.3% this year to 2.7% in 2009, but its annual average growth rate is expected to reach 4.1% from 2011-2013.

Final Thoughts
Commodities prices have stalled in today's market, but the original vision for the dominance of BRIC countries came with a time horizon of 2050. The story of emerging markets' demand for resources remains intact even as the current economic crisis has put the brakes on the speed of development. Expectations may have been lowered, but Brazil's potential as a resource provider for the future has not gone away. The short term pain for ILF investors could mean positive future returns for investors who combined a dollar cost averaging approach with a long-term investment horizon.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

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