x Abu Dhabi, UAEThursday 20 July 2017

After a decade of outperforming, Brazil's economy loses step

The samba economy is slowing, but analysts say there's still a lot to look forward to, in particular the Fifa World Cup and Olympic Games in 2016.

Despite some inherent weaknesses, Brazil is showing signs of economic stability as it prepares for two major sporting events. Mario Tama / Getty Images
Despite some inherent weaknesses, Brazil is showing signs of economic stability as it prepares for two major sporting events. Mario Tama / Getty Images

The samba economy is slowing, but analysts say there's still a lot to look forward to, in particular the Fifa World Cup and Olympic Games in 2016.

Despite its recent economic woes, Brazil is shaping up to be an increasingly interesting home for mid- to long-term investment.

Once the dust has settled on the economic turmoil now being seen across the world's developing markets, Brazil is set to prove that it is increasingly attractive to foreign investors.

While there are inherent risks in investing in any developing country, Brazil is starting to show signs of economic and political stability. The country is a strong exporter of agricultural products, cars, machinery and iron ore.

Crucial to the long-term growth of its domestic economy is the fact that more than half of Brazil's 200 million people now regard themselves as middle class.

Unemployment is also at a historic low, while wages have been increasing. This has created a new consumer class in Brazil, reflected by online spending of US$13 billion (Dh47.7bn) a year, despite the fact that only roughly 40 per cent of the population is connected to the internet.

The consumer spending that has been fuelling Brazil's economy in recent years is also scheduled to be given a boost by two major global sporting events. Two years from now, the Fifa World Cup 2014 will arrive in Brazil. And in 2016, the Summer Olympic Games will be held there. Both events will require massive infrastructure spending that should benefit not only the economy, but also companies trading on Bovespa, the stock market.

But despite a growing middle class with its easy credit and growing spending power, investment firms and analysts are now changing from being bullish to bearish on Brazil. Some are predicting instability and investors must be highly selective and cautious about where they choose to invest.

"After 10 years of economic outperformance, there are now serious doubts over what will happen over the next few years," says Tony Volpon, an analyst at Nomura.

Mr Volpon believes there may be some structural faults in Brazil's economic strategy that are increasingly in danger of being exposed in the prolonged global recession.

"So far, the government has largely tried to apply old medicine to a new disease in the shape of short-term incentives to consumption. We can only hope that these activity numbers lead to a wholesale rethink of a consumption/credit growth strategy that we think is no longer useful."

Mr Volpon and other analysts sceptical about Brazil's future say the country has been too keen to increase living standards at the cost of productivity.

"Boosting wages above productivity has priced Brazilian industry out of markets, while the expansion of credit, especially to consumers, will need to slow down if a damaging bubble is to be avoided," Mr Volpon says.

According to John-Paul Smith, an analyst at Deutsche Bank: "The government and central bank in Brazil have taken action on a number of fronts but the equity market, in particular, is rightly sceptical - in our view - that they are moving in the right direction."

Despite analysts' misgivings, some major manufacturers take a different view.

China's computer giant Lenovo, for example, is reported to be planning a major manufacturing facility in Brazil simply to address Brazilian consumers without having to pay the country's high import taxes.

Lenovo is the biggest player in China's personal computer (PC) market, with a 30 per cent market share. It also claims to be the best-selling PC brand in India.

But a slowdown in its domestic PC market is forcing Lenovo to find rapidly expanding markets elsewhere and it has set its sights on Brazil.

The new Lenovo plant will be in Sao Paulo state and is expected to be operational by the end of the year. It will produce desktop computers and notebooks targeted at both the consumer and business market in Brazil.

There are also growing reports that Apple is planning to use the Foxconn facility in Brazil and not in China to manufacture its next consumer blockbuster device, a smaller version of the iPad nicknamed the "iPad mini".

With its growing educated classes and largely untapped market for internet-based telecommunications, Brazil is now starting to attract long-term investment from 21st-century industries.

But investors need to be careful about investing too soon in what is still a highly volatile local sector. One example of a telecoms company that has had a roller coaster of a share rise of late is NII Holdings, which has lost much of its value.

However, the fall of some Brazilian equities in the past few months can also be attributed to the global recession and a general investor disenchantment with the world's developing regions, often referred to as the Brics (Brazil, Russia, India and China).

For many investors unable or unwilling to monitor a stock portfolio covering rapidly moving sectors such as telecoms, the most obvious choice is often real estate. At one level, this might mean buying and letting properties across a number of countries.

At another, it could mean investing in a second or third home in an area of natural beauty.

According to Jones Lang LaSalle, the international property firm, transparency in Brazil's real estate market is showing improvement.

Meanwhile, International DLT, a UK-based property developer, says the Brazilian real estate sector has made significant progress over the past few years and new investors should not be wary of entering the market. But all property markets go through periods of overheating and correction, if not boom and bust.

In Brazil, a shortage of homes for its aspiring new middle class has had the effect not only of driving up prices, but also of driving down the quality of investments.

There are even reports of speculation in the value of individual dwellings in the country's infamous favellas, or shanty towns, until now a byword for poverty.

Investors of any kind should, however, be very cautious of short- term factors such as a possible credit crunch, although lower interest rates could give a boost to credit.

"Dynamics in credit markets also show exhaustion," says Mr Volpon. "Here, the problem is the still very high cost of credit. Despite lower policy rates, credit costs have remained broadly the same since 2009, with consumer lending rates in the 40 per cent a year region. The days of heady credit market expansion seem over."

pf@thenational.ae