COLUMN-The score on Brazil as a long-term investment

Mon Jun 16, 2014 11:03am EDT

(The opinions expressed here are those of the author, a columnist for Reuters)

By John Wasik

CHICAGO, June 16 (Reuters) - The beginning rounds of the World Cup have offered thrills to global soccer fans. But what should excite investors about Brazil?

The South American country is brimming with natural resources and growth possibilities. Despite concerns about its growth slowdown and its preparations for the upcoming Olympics, the country can be a good holding if global population growth remains on course.

There are more than a dozen exchange-traded funds (ETFs) that hold Brazilian stocks exclusively. They vary from broad-based index funds to specialized ETFs that use leverage to amplify market moves.

The largest ETF covering Brazil is the $4 billion iShares MSCI Brazil Capped fund, which holds large companies such as Itau Unibanco, Ambev SA and Banco Bradesco SA. The fund is up 11 percent year to date through June 13, compared with a 6.4 percent rise for the Morningstar Latin America stock index. The fund charges 0.61 percent in annual expenses.

A runner-up in Brazilian funds is the Market Vectors Brazil Small-Cap ETF, which holds small companies such as SUL AMERICA SA, Odontoprev SA and Mills Estruturas. The fund charges 0.60 percent in annual expenses and is up 4 percent year to date through June 13.

SHORT-TERM CONCERNS

Ignoring the current excitement over the World Cup, global investors have raised the yellow penalty card when it comes to Brazilian economy. It has only grown 2 percent annually since the current leftist president, Dilma Rousseff, took power in 2011.

That's a disappointing rate considering that the country had been one of the emerging market darlings in the "BRIC" group, which also includes Russia, China and India. Brazil grew by about 7 percent in 2010, roughly keeping pace with the world-leading growth in China.

Lately, though, the home to Carnival and the Amazon River Basin has slipped. It is expected to grow only 1.8 percent this year, according to an International Monetary Fund forecast. The country's economy expanded by only 2.3 percent in 2013, the second consecutive year that it posted that growth rate. The IMF forecasts growth may only inch up to 2.7 percent next year.

An even more recent survey by economists last week pegged Brazil's growth at 1.4 percent this year, down a notch from 1.5 percent in an earlier survey. Inflation is expected to remain uncomfortably high, at nearly 7 percent.

If economic forecasters are ho-hum on Brazil, why should it be a long-term holding? The answer: commodities are essential to the developing world, and that is where Brazil can continue to score points.

Three years ago, Brazil's bountiful exports helped push it past Britain as the world's sixth-largest economy. It's one of the largest producers of high-quality coffee beans, soybeans, corn, orange juice and sugar. Brazil's huge investment in soybean production, for example, has catapulted it above the United States as the world's largest producer.

Although bad weather and climate change will affect Brazil's agricultural output, the country will largely benefit from the growth in the world's population, particularly in the developing countries.

By 2050, the world's population is expected to reach nearly 10 billion people, according to Pew Research Center. Africa's population, which is growing the fastest, is expected to account for one quarter of the world's people, compared with just 15 percent in 2010. India is expected to replace China as the most populous nation. Growing populations will need more food, especially those countries where arable land is scarce.

BUFFERING SINGLE-COUNTRY RISK

Despite Brazil's role in meeting the growing long-term demand for commodities, I'm always leery of putting too many eggs in the basket of a single country, especially emerging ones. Their currencies, economies and fortunes rise and fall with any number of factors. Brazil will still have short-term problems with its currency, inflation and low commodity prices.

For a more diversified and lower-risk play in Brazil, consider buffering it by investing in an emerging markets ETF such as the iShares MSCI Emerging Markets Fund, which costs 0.67 percent annually to own. It holds a small stake in Latin America - about 17 percent of its total holdings - compared with 63 percent of its portfolio in Greater Asia. The fund is up 4 percent year to date through June 13.

A broader basket will not only lower your exposure to the short-term risks in Brazil, but give you a slice of countries where growth is advancing faster than the rate of inflation. (Follow us @ReutersMoney or here Editing by Lauren Young; and Peter Galloway)

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