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Brazil's Hot Stock Market

Written by Brian Hicks
Posted August 28, 2007

The hottest spot in Brazil isn’t the Copacabana beach. It’s not the Sambadrome built for Carnival parades or the violent streets of the hillside favelas. It’s the stock exchange.

Brazilian culture has usually reached European and American ears in sanitized form, carried by the smooth bossa nova music of the sixties and international soccer stars such as Pelé and Ronaldo, who have given their country five World Cup championships.

While these narrow visions of Brazil had a foothold in the industrialized world, the Brazilian government busied itself with the construction of a super-modern capital city, Brasilia, in the interior and developed the Pro-Alcohol program to boost its sugar-based ethanol production to tops in the world.

Pro-Alcohol sounds like an ambitious push for a bull market in booze, but it actually refers to ethanol, the crop-based fuel that is driving so much debate in the United States as industry and agricultural leaders push the corn-based variety in DC and Detroit. In the 1970s, amid fuel shocks that somewhat moderated consumption in developed countries but did little to alter fuel sources, Brazil had an eye toward the future, incentivizing both production and consumption of this renewable fuel.

As I have conversed in Portuguese (which I learned through Spanish with friends in university) with representatives of Brazilian national petroleum company Petrobras (NYSE:PBR) and other industry participants at conferences in England and Colombia, they have invited me to see the progress for myself.

I intend to take them up on the offer, but I can already see what Brazil’s economy is doing on the back of the Pro-Alcohol gamble. It is paying off for Brazilian investors and foreigners who take advantage of the smashing success of the São Paulo Stock Exchange and its leading index, the Bovespa.

Let’s take a quick trip to Brazil. Just take a look at the Bovespa’s performance compared to the S&P and Dow over the past two years:

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The Bovespa has drubbed Wall Street so severely that it makes a soccer field trouncing between the two countries pale in comparison.

The MSCI iShares Brazilian ETF is the optimal pure play on the Brazilian index, tracking the Bovespa’s gains and even outperforming it at many points since mid 2007. Before the recent market downturn, NYSE:EWZ climbed to a 150% gain over the two-year period.

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There are also hot individual stock plays, like a broadband internet and cable company with stellar subscription growth that is already providing data and entertainment services to over 44 cities throughout Brazil. This play, known for months to my Orbus Investor premium subscribers, rose twice as quickly as the peppy Bovespa since July 2006. Though Italy won the World Cup last summer, Brazil still kept on producing winners.

From the broad, 40-stock Brazilian ETF to a double-time Orbus play, let’s take a look at the IPO market, which many investors are using as a barometer of sentiment these days.

Are startups sheepish? Will the market accept new opportunities or back away from anything billed as “rookie of the year?” Given the buzz around ethanol and other future fuels that has driven record corn cultivation in the States and increased sugar planting in Brazil, one IPO should be going gangbusters.

But take a look at Brazil’s Cosan Limited (NYSE:CZZ). Cosan, which produces sugar and sugar-based ethanol, raised less than planned in their IPO two weeks back. The funding is intended to finance acquisitions and new mill construction in order to keep pace with increasing international demand for biofuels.

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Up north, US agribusiness giant Cargill said on 28 Tuesday that Brazil faces a domestic oversupply of ethanol in two years. That could put downward pressure on ethanol prices and remove some of the allure from capacity increases that have come into fashion in Brazil and the US alike. Nevertheless, Cargill plans to double its own sugar processing capacity for ethanol export to the US from its Brazilian Cevasa plant in mid-2008.

One thing is for sure: Brazil got the jump on American industry in the ethanol game. The country is emerging from decades of brutal Latin American dictatorship and economic mismanagement into an international market that counts it among the top developing economies on the planet.

Brazil’s national motto is Ordem e Progresso, which mean “Order and Progress.” Through most of the country’s history, these two simple words have been complicated in practice, but now Brazilians and international players know they have plenty riding on Brazil’s continued success.

Regards,

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Sam Hopkins

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