12.5% return in USD p.a. : From the land of Samba

Brazil is a country of charming people with less than 200m Brazilians.

It has significant advantages to most other similar sized large economies:

1. It's population is limited to 190m people approx. as per latest census data available.

2. Its unemployment rate is better than most countries at 4.7%.

3. Its currency, the Brazilian Real has appreciated over 55% in past 10 years since 2002, from 3.87 to 1 USD in Sept 2002 to 1.71 to the USD today.

Unlike most other countries such as India which has performed ZERO in past 10 years and is still at 49 level since 2002 until date despite all the volatility in between.

South African Rand has appreciated only 35% over past 10 years from 11 to USD to 7.71 today, unlike Brazil which is 55% up.

Indonesian currency has appreciated only 12% from 10,210 in 2002 to IDR 8,958 today.

Chinese Yuan has appreciated 23% since 2002, from 8.27 to USD to 6.30 today.

In the neighbouring region, Mexican currency has DEPRECIATED from 9 to the USD to 12.75 to the USD today with a currency loss of 41%!

Under this scenario, Brazil looks to be the strongest in the whole world if not in Latin America and the leader of Latin America.

Brazil has slightly underperformed over the last 2 years and this can be associated to the global crisis and the change of Presidency from President Lula to President Dilma on Jan 1, 2011. Still, its currency appreciated from 1.90 levels to 1.70 level today, an approx gain of 29% since Feb 2009 in past 2 years. Only its stock market index, Bovespa, has underperformed from 69,000 level 2 years ago to 65,000 level today.

Some tight regulations such as 2% tax on any new incoming funds to reduce international hot money flowing into equity and fixed income markets in order to bring only serious investor money to Brazil in 2009 and then in 2010, thereafter, this tax was increased to 4% and further to 6%.

However, in Dec 2011, this tax rate was eliminated and brought down to zero which brings us to the New Year in 2012, today, and the immense opportunity that lies ahead of us.

4.
Some comparable USD bonds issued by Rep. of Brazil (BBB rated) are below:

Issue Date    Maturity Date    Coupon    Price Today    Yield
Jan 2006      Jan 2037               7.125%       USD 139        4.50%
Jan 2005      Feb 2025               8.75%        USD 151        3.75%
March 2001 Apr 2024               8.875%      USD 152        3.58%
Jan 2000      Jan 2020                12.75%      USD 168        3.00%

You will observe that as the issue date comes closer to today and the Brazilian economy does better - as reflected by the rising strength of its currency - the COUPON keeps declining, which is another indicator of strength. This shows that Brazil is now able to borrow money at much cheaper rates than it could 10 years ago!

This cannot be said most other countries including Western Europe which sometimes are paying more and sometimes just little less, but certainly not down from 12.75% in 2000 to 4.5% levels today over the past 10 years alone!

5.
Not only Brazil's population is lower, hence it has lesser social problems than other countries, but its banking and real estate sectors are quite robust.

For example, the Debt to GDP ratio of Brazil is close to 66% which is 93% for USA, 220% for Japan and 142% for Greece! India is at 69% while Germany is at 83%.

This makes Brazil much more nimble and with potential to rise much more faster in the coming years ahead.

Brazil's GDP growth is estimated to grow at 3.50% in 2012 on a GDP size of USD 2.1 trillion valued at USD 73.5bn. In 2011, they averaged 3.72% and in 2010 was 7.57%.

6.
The Chart of Rep. of Brazil 2041 maturity bond is attached.

This was issued in Oct 2009 and is trading at USD 117 level with a yield of 4.50% in USD p.a. This is the latest bond in USD issued Govt of Brazil in 2009.

Its size is USD 2.9bn with a rating of BBB by all 3 agencies.

Minimum size is USD 100k and is guaranteed by the Govt of Brazil.

It had gone down below USD 100 until May 2011, however, since then has robustly risen to USD 117 today.

I believe it is a good buy, despite the longer dated maturity because as we have seen in Ireland, Greece or Dubai, that countries cannot fail though their problems may continue and the sooner they resolve their problems, then the bonds do come back if issued by Govt or Govt entities.

However, in the case of Brazil, they have no problems at all, according to data shown above, and therefore, their long dated bonds should continue to rise.

I expect them to rise to USD 125 levels which is 8% capital gain plus 4.5% interest for a total potential yield of 12.50% within one year.

I also expect the bond price to rise to USD 135 levels within 3 years while generating 4.5% p.a. coupon for a TOTAL cumulative yield of 30.50% within three years in USD.

Over the next 5-7 years, this bond has the potential to rise to USD 150-155 levels while generating 4.5% p.a. return annually.

This has happened in bonds issued previously so there is no reason it will not happen in this bond mainly due to the strong fundamentals of the Brazilian economy.

Stay tuned...