Brazil as a Hedge on Inflation

CEO of Asset Management at HSBC Brazil, Pedro Bastos describes Brazil as a save haven in a difficult global economic climate:

The Brazilian market is a natural hedge for inflation on a global basis because of the heavy weight of commodity producers on equity itself. But again, Brazil is one of the few countries that offer a very appealing proposition of strong domestic consumption, infrastructure development, and also convergence of interest rates and commodities. So all four drivers playing at the same time.

He says the rapidly-growing middle class is a major driver of growth:

 As a result of personal income growth and low unemployment, there has been a huge migration of people - around 20 million over the past few years - from below the poverty line to the middle class.

Infrastructure is the second component of growth. Brazil is behind the curve with respect to national infrastructure. Fortunately, the government is in a financial position to spend. Along with the $600 billion Accelerated Growth Program (PAC2), Brazil has additional motive to build agressively in preparation for the 2014 World Cup and 2016 Olympics.

Bastos describes the interacting factors relating to commodities, energy, and trade:

Energy is also part of infrastructure and hence, I would like to talk about the oil sector. We have found pre-salt oil reserves along the coastline and that, in itself, will be a major driver for development and growth over the next few years. We will be producing 2.5 million barrels of oil by 2015 and the number will go up significantly by 2020.

Commodities: Though commodities contribute to only 6 per cent of Brazil’s GDP, it is the world leader in production of a number of hard and soft commodities - iron ore, sugar cane, coffee, to name a few.

Well-diversified export dependencies: Brazil is not dependent on the US or China alone for its exports. Hence, any impact on these economies does not impact Brazil significantly. Since 2009, China has replaced US as the largest buyer of Brazilian exports.

At CNNMoney, Penelope Wang discusses the importance of emerging markets to a well-diversified investment portfolio:

Developing nations are leading producers of raw materials and commodities, whose prices tend to keep pace with inflation. That makes emerging-markets stocks a good inflation hedge, says Pittsburgh investment adviser Lou Stanasolovich.

Developing markets can also provide diversification in the event of deflation, since fast-growing nations, such as China and India, are likely to keep expanding -- in part based on rising domestic demand -- even if the U.S. lags. Indeed, the Chinese economy is forecast to grow around 8% or more every year for the next decade, according to IHS Global Insight.

Currency trends also demonstrate the value of emerging market investments. With Europe and the United States burdened under heavy debt, and with stagnant economies, future trends will give advantage to countries like Brazil, with low debt levels, healthy growth, and an abundance of natural wealth. Further depreciation of the Dollar and Euro appear very likely. Brazil may find that one of its greatest challenges is managing the strength of the Real.