Why Indians should invest in BrazilThe two economies complement each other. A small exposure to a Brazil-focussed fund willprovide a hedge to an all-India portfolio.Author : iFast ContentBrazil is going to be very much in the news for the next few years. The reason not hard to find:playing host to the World Cup (2014) and Olympics (2016).Right now, it is getting noticed for other reasons.Reuters reported that retail sales fell unexpectedly in December 2012, as rising inflation beganto erode consumer spending. This was indeed disappointing as strong consumer spending hasbeen one of Brazil’s few consistent engines for growth. Due to personal income growth and lowunemployment over the past few years, there has been a huge migration of millions of peoplefrom below the poverty line to the middle class. Around 60% of Brazil’s Gross Domestic Product(GDP) comes from domestic consumption.Inflation is eroding purchasing power and rising prices have led to a drop in real wages, despiterecord-low unemployment. With inflation at 6.15% in January 2013, the government mayincrease interest rates earlier than expected to dampen prices. Which, unfortunately, will hit theconsumption story. This is bad news as manufacturing continues to stagnate due to weak globaldemand and soaring labour costs.A Financial Times blog presents the conundrum well. It quotes a Goldman Sachs report thatsays that despite the slight loss of momentum in the last quarter of 2012, the retail sectorremains one of the most dynamic in the economy. But Capital Economics believes that the paceof consumer spending growth in Brazil is unsustainable as is the rapid expansion of consumercredit.The government will have to find ways to fire up other engines of the economy, such asinvestments. Thanks to the massive sports events to be held, there is considerable activity onthis front. The Brazilian Ministry of Sports has estimated that the economic impact of the WorldCup event alone over the period of 2010 and 2019 would amount to $27 billion of directinvestments in infrastructure, tourism and consumption, while the indirect investment would be$135.7 billion. Employment generation and tourism will get a strong boost.While both Brazil and India share a strong domestic consumption story, what makes Brazil aninteresting addition to one’s portfolio is the way that economy complements India. From aninvestor’s point of view, investing in Brazil is taking a position on commodities. If one looks atthe BRIC countries, China and India have a great need for energy, metals and foodstuff, andimport much of the same. On the other hand, Brazil and Russia are best positioned to supplysuch a need. Russia exports oil, natural gas, nickel and platinum group metals. Brazil is theworld leader in production of, or at least has a production surplus in, a number of hard and softcommodities (iron ore, sugar, soybeans, coffee, corn, orange juice, beef, poultry).
British investor, Jim Slater, was known to have said that “Brazil is insulated against the world’smain shortages – fresh water, agricultural commodities and energy.” It contains nearly a fifth ofthe world’s fresh water, available to expand agricultural production and carbon-free electricitygeneration. A sharp contrast to India.The best way to understand how investment in Brazil can act as a hedge in an otherwise all-India portfolio is to look at the impact of crude. Around two years ago, Goldman Sachs came upwith an interesting inference. It stated in its ‘Asia Economics Analyst’ edition that a VAR (value-at-risk) analysis on India suggested that a $10 increase in oil would reduce GDP growth by 0.2%while the current account deficit would rise by 0.4%. On the other hand, Brazil’s economicgrowth would be supported with surging oil production and a rise in the price of crude wouldbenefit the country positively. Fast Market Research, in their latest Brazil Oil & Gas Report,have stated that they are firmly bullish on the long-term outlook for the country’s energy sectorwith production being pushed to new highs.As an Indian investor, it would do well to have some global exposure in your portfolio. In thisregard, an investment in Brazil makes for a complementary fit. HSBC Brazil Fund is a fund-of-funds (FoF) that invests in HSBC Global Investment Funds Brazil Equity Fund.Our research team will be looking at this fund in detail in the coming days. Watch this space.To buy and sell mutual funds online, click hereContent Team,Fundsupermart.com | iFAST Financial India Pvt Ltd.DISCLAIMER iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of theAsset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materiallyinterested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of anymutual fund. No investment decision should be taken without first viewing a mutual funds scheme information document includingstatement of additional information. Any advice herein is made on a general basis and does not take into account the specificinvestment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legaladvice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of thefuture or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise.Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website .Please read ourdisclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is noguarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, theNAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets.Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name ofthe Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement ofAdditional Information and Scheme Information Document carefully before investing.