According to a recent S&P ratings report, Brazil holds a lot of promise for the savvy investor.
But first, how has friction between the US and China affected business in China’s own back yard?
US-China Friction has an Impact on Chinese Satellite Economies
US buyers are placing their orders in countries that they hope won’t be affected by a collapse in US-China trade. These new investment sites’ response to the new demand will only be limited by the capacity of their infrastructure.
The international news is full of reports and suggestions that US investment dollars and production contracts should go elsewhere in Asia, namely to Vietnam, Malaysia and Bangladesh, all major Chinese trade allies or beneficiaries of Chinese infrastructure investment.
Predictions about the fate of these satellite economies, due to a combination of China’s shifting internal economy, from production to consumption, and the dampening of trade with the US, are all bad for both short term and long term.
These neighbors of China are expected to suffer from a dive in Chinese trade because their products have been upstream to Chinese manufacturing (they export to China).
It is said trade friction between the US and China could lower Chinese growth by one percentage point, and that is bad news for any country that has been sending its products into the supply chain of Chinese exports.
As the old saying goes, “When elephants get into a tussle, they trample the smaller countries around them!”
It is a no-brainer for those invested in US-China trade to shift the whole trade cycle to these Chinese proxies, reserving trade to familiar and easy to understand channels.
For example, Taiwanese companies are moving their production of US products away from their Chinese plants to ones in Vietnam.
This trend seems to be happening already, as it is reported foreign direct investment in Vietnam went up 86.2% in the first quarter of 2019, half of it Chinese. Last month, exports to the US increased 29% and capital investment skyrocketed 200%.
The Malaysian economy also stands to gain when the giants lose, thanks to a tech-oriented infrastructure and a better educated work force.
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Renewed Interest in Brazil by Both Sides
In the midst of uncertain trade negotiations between the US. and China, investors are casting an interested look at Brazil.
The most attractive thing about Brazil as an investment vehicle is the capacity that has gone unused since their recent recession. Heavy industrial plants are available for use, though there is some need to update them technically.
Brazil already has a strong relationship to both China and the US. 22% of Brazilian exports go to China (soybeans, iron ore and crude oil), and 11% to the US (oil, iron and heavy machinery & parts).
Of all imports to Brazil, China contributes 19% (electronics and value-added food and consumer goods) and the US 15% (mainly petroleum; Ag chemicals).
With a Standard and Poor’s (S&P) rating of BB/stable, Brazil could be a very attractive investment in certain sectors. The key to S&P’s keen interest in Brazil, according to their recent report titled “Brazilian Corporate Outlook 2019: Hope Is In The Air,” are the extensive reforms being enacted by Brazil’s newly elected President Bolsonaro.
Brazil is just coming out of a four year recession which included much consolidation of market players- now companies are executing the efficiencies of that consolidation.
A modest projected growth of 2.5%, combined with controlled inflation and improved consumer participation, all support a good economic climate in Brazil.
With the recent election, there’s been a shift in government policy toward nurturing consumer credit and supporting a business friendly environment through subsidies, simplification of regulations, and anti-corruption legislation & prosecution.
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A Domestic Economy Based on Consumer Confidence
Recent improved consumer confidence and demand for goods and services has supported growth in the telecom sector, mainly mobile and internet, as well as toll roads, and retail sales throughout the country.
The recession affected retailers like grocers and department stores by driving consumers either to a cash economy or to the internet to shop. Concerted efforts by the government to regulate credit card companies and push credit to consumers supports the retail sector.
In addition to consumer confidence, government action to support infrastructure is boosting expansion, supporting the economy, consumer confidence and private investment.
The government is supporting stabilization in the following sectors, in order to stimulate consumer and commercial demand: electric utilities, rail roads, and toll roads.
In addition, plans to privatize the rails and national airline companies are a great invitation for international investment.
The last group of sectors reviewed by the S&P report were those largely affected by the global economy: forestry, oil and gas, metals, and sugarcane production.
Interestingly, stricter environmental standards in China have shifted an increased demand for high quality forest products to Brazil. In addition increased domestic demand for consumer housing supports the forest products industry.
Metals and Mining
Generally profitable thanks to international demand for steel, investors should take note of the idle capacity in Brazil’s steel plants.
Oil, Gas, and Chemicals
The global oil outlook, and trends away from oil and gas, are typical concerns for the oil industry throughout the world, including Brazil.
Sugarcane processors are supported by two factors: the ability to switch to sugar production as international price changes dictate, and the fact that ethanol, made from sugar cane, is mandatory in all Brazilian vehicles! Ethanol production is down world-wide, which should support ethanol prices. In addition to mandatory national ethanol use, there are further government subsidies to the sugarcane processors, called Certificates of Agricultural Receivables.