Brazilian Stocks - Equities in Brazil

The Brazilian Investment
The Monopoly in Brazilian Beverage Industry (Company Name Abridged)

When we make investments in a foreign company, we first have to evaluate the political, economic, and financial stability of the country or countries that the company operates. When an investor makes a sound judgment investing abroad, the return on his or her foreign investment may be higher than if the investor limits him or herself in a single country. First, investing in foreign countries presents more opportunities than investing domestically, because each country’s stock market has its own cycles, and they are not necessarily related to stock markets in other countries. Second, if the currency of the country appreciates against an investor’s base currency (in most cases, the US dollar), then the investor would not only benefit from the rise of the stock market, but also the appreciation of the currency.

I. BRAZIL

Background Information

Possessing large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. The maintenance of large current account deficits via capital account surpluses became problematic as investors became more risk averse to emerging market exposure as a consequence of the Asian financial crisis in 1997 and the Russian bond default in August 1998. After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998. In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the US dollar. This devaluation helped moderate the downturn in economic growth in 1999 that investors had expressed concerns about over the summer of 1998, and the country posted moderate GDP growth. Economic growth slowed considerably in 2001-02 - to less than 2% - because of a slowdown in major markets and the hiking of interest rates by the Central Bank to combat inflationary pressures. New president DA SILVA, who took office 1 January 2003, has given priority to reforming the complex tax code, trimming the overblown civil service pension system, and continuing the fight against inflation. (Source: CIA World Fact Book, August 2003).

Economic Indicators

Above statistics and graphs show a cautiously optimistic picture about the economy and the financial market of Brazil. In 2003, inflation in Brazil decreased while the currency, Brazilian Real, appreciated against the US dollar. Although capital account decreased, Brazil starts to enjoy a current account surplus in late 2002. Since January 2002, Brazil’s exports exceeded imports, thus creating a trade balance surplus. External debts remained stable, while the government focuses on reforming the civil service pension system.

We believe that the Brazilian currency will remain at least stable, if not appreciate, against the US dollar, due to the increase of trade surplus of the Brazilian economy. US dollar will remain vulnerable in the next a few years amid the increase of US national debt.

Interest Rates

Interest rates are inversely related to the performance of the stock market. In an interview with Fortune Magazine on December 10, 2001, Warren Buffett, a well-known investor, listed the following data:

Dow Jones Industrial Average
Dec. 31, 1964: 874.12
Dec. 31, 1981: 875.00

Dow Industrials
Dec. 31, 1981: 875.00
Dec. 31, 1998: 9181.43

Interest Rates, Long-Term Government Bonds
Dec. 31, 1964: 4.20%
Dec. 31, 1981: 13.65%
Dec. 31, 1998: 5.09%

Above data implies and suggests that the decrease in interest rates from 13.65% to 5.09% between Dec. 31, 1981 to Dec. 31, 1988 is one of the main causes of the Dow Jones Industrial Average’s surge from 875.00 to 9181.43 in the same period. And the increase of interest rates, on the other hand, is one of the main reasons that the stock market went sideways from Dec. 31, 1964 to Dec. 31, 1981.

In 2003, the central bank of Brazil decreased interest rates, lowering it from 25% to 22%. According to our friends that work in the Brazilian government, it is expected that the Brazilian central bank would again lower its interest rates in the near future. Therefore, it is expected that the Brazilian stock market would rise over the near term.