Brazilian Banks/Asset Managers Continue to Gain Assets ~ market folly

Friday, September 12, 2008

Brazilian Banks/Asset Managers Continue to Gain Assets

With Brazil's emergence onto the global economy, there have undoubtedly been some excellent investment opportunities. But, most of the gains have been concentrated in the energy and natural resource spaces. As Brazil continues to emerge as a growing nation with a strong economy, I've turned my focus to the next wave of investments to make in Brazil. And, I think it can come from a sector that has been touched on by many before, but has never really garnered the spotlight. I'm talking about Brazilian banks and asset managers. Over the long term, their financial landscape will continue to evolve and the underlying financial firms are poised to benefit, seeing as Brazil has now become a net foreign creditor. Also, due to the booming economy, many Brazilians have started to enjoy new-found wealth and are turning to banks/asset managers looking for a place to put their hard earned money to work.

Institutional Investor has a piece out that discusses how Brazil will see an influx of cash from foreign pension funds. The reason behind this is because the nation's long term foreign currency debt was recently upgraded to investment grade. Also in the article is a quick list of Brazil's biggest money makers. In it, you will notice that some of the mainstream banks that trade on ADR's here in the states are among the biggest asset managers in the country: Banco Bradesco (BBD), Banco Itau (ITU), and Unibanco (UBB). Numerous hedge funds I track here on Market Folly have been in and out of these names, but they have never been major stakes or top 10 holdings. These are larger cap names which could be great long term investments (5-10 years).

And, even more hidden from the limelight are mid-cap Brazilian banks and asset managers. You won't find any of these mid-cap names traded on ADR's here in the states. Instead, you'll have to go directly to Brazil to buy them. Obviously, these names are difficult for the average joe to just invest in. And, they are also riskier investments. Firstly, you have to overcome the barrier of entry and find a way to personally invest in Brazil directly. Secondly, you have the added currency risk. But, nevertheless, they represent an interesting opportunity within Brazil's burgeoning financial landscape.

Individual risks aside, Brazil as a whole also has some risks investors need to be conscious of. Over the past few years, they have been heavily reliant on commodity sales abroad. Should a global economic slowdown present itself, Brazil's growth rate would obviously be in jeopardy. That would be the true test as to whether or not they could diversify their exports enough to protect their long term growth. Having enjoyed low borrowing costs and record commodity prices on exports for nearly five years, Brazil has been on 'easy street.' The question remains, "How will they respond if and when tough times arise?" It's always something to keep in the back of your mind. Additionally, one must be concerned with the Brazilian currency, the Real, which has seen massive appreciation to near its highest levels since 1999. Over the past few years, the central bank has been continually purchasing US Dollars in an attempt to slow further appreciation. Obviously every investment has risks, and its important to understand all the various risks associated with investing in a booming country like Brazil. Stay tuned in the coming weeks, as I am in the midst of completing my research on both the larger cap and mid-cap Brazilian names as I search for prospects for my über long-term portfolio.

Source: Insitutional Investor here and here.

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