Investing: Playing the Brazil Boom

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Fund managers see a wide range of sectors to invest in, from banks to telecom providers to real estate developers, all bound to gain from growing consumption among Brazil's growing middle class.

"This is like the U.S. in the 1950s. It's a different generation [of wealth creation]," says Terrence Gray, who manages emerging market portfolios with $3 billion in total assets at DWS Scudder. He says he's confident commodities will stay stronger for longer, which will help support consumer growth trends.

Real Progress for the Real

Consumption growth is tied to improving economic circumstances that stem from Brazil's replacing its trade deficit with a large current-account surplus. That has strengthened the currency, which is up more than 19% against the dollar in the past year; has reduced Brazil's debt load; and has helped lower interest rates, making credit more widely available to businesses and individuals.

Wider access to credit has fueled the mortgage market, enabling many Brazilians to buy their own homes for the first time. The mortgage market is still only 2% of GDP but could grow to at least 10% of GDP by 2013, predicts BlackRock's Landers.

Commercial banks like Banco Bradesco (BBD) are a great way to tap into the expanding consumer economy with none of the exposure to risky credit derivatives that landed U.S. banks in so much trouble, fund managers say. Bradesco's loan portfolio grew by 38.5% in the first quarter of 2008, according to Threadneedle's Thompson.

More affordable credit is also helping drive a boom in real estate development and retail spending.

A Sea Change

Confidence in the Brazilian central bank's ability to fight inflation, along with a number of structural improvements, have led to a sea change in the way the government debt is viewed. Standard & Poor's Rating Services upgraded the country's long-term foreign currency sovereign debt to investment-grade on Apr. 30, and Fitch Ratings following suit a month later.

"The investment-grade [rating] makes a big difference to the ability of financial stocks to raise capital more cheaply abroad," says Thompson. "As the cost of credit comes down, there's a direct impact on companies' [profit and loss statements] and their ability to maintain growth."

A case in point is Cyrela Brazil RLY AD (CYRBY.PK), a property developer in São Paulo and Rio de Janeiro, whose pre-construction sales of multifamily homes surged 95% in 2007 from the prior year. Cyrela doesn't start building new properties until it has pre-sold them to home buyers, so the strength of the pre-sales suggests how much revenue will be flowing into the company's P&L this year.

Companies such as Cyrela can expand their business only to the extent that the country's financial markets strengthen, especially the mortgage market, says Thompson. "For that to happen, you need to see a much more stable lending environment. Otherwise, the banks won't open up their balance sheets to that kind of risk," he says.

On a Shopping Spree

Retailers such as Lojas Renner (LREN3.BZ.) and Lojas Americanas (LAME3.SA) are seeing revenue rise—not just from growing consumer demand but also from partnerships with banks to distribute financial services such as auto loans and insurance products, says Landers.

America Latina Logistica (ALLL11.BZ.), one of the country's two major railway networks, is a way to play the growing agriculture industry. "[The company] transports hard and soft commodities across the country to the ports," says Gray at DWS Scudder. "That network is going to need to expand. It will have to add more [rail]cars. That's the main conduit for trade in Brazil."

Any way you slice it, Brazil is likely to keep growing for many years to come. Even if the commodity plays have become too rich for some investors, the budding consumer economy offers less pricey ways to get in on the action. Given how many of these stocks don't trade on U.S.-based exchanges, your best bet may be to buy a piece of an emerging markets mutual fund heavily weighted toward Brazil. In addition to the Threadneedle and BlackRock funds mentioned earlier, investors may want to take a look at the DWS Latin America Equity Fund (SLAFX) and the Fidelity Latin America Fund (FLATX).

Bogoslaw is a reporter for BusinessWeek's Investing channel.