The two economies complement each other. A small exposure to a Brazil-focussed fund will provide a hedge to an all-India portfolio. An article by Fundsupermart.com

1. Why Indians should invest in Brazil
The two economies complement each other. A small exposure to a Brazil-focussed fund will
provide a hedge to an all-India portfolio.
Author : iFast Content
Brazil is going to be very much in the news for the next few years. The reason not hard to find:
playing host to the World Cup (2014) and Olympics (2016).
Right now, it is getting noticed for other reasons.
Reuters reported that retail sales fell unexpectedly in December 2012, as rising inflation began
to erode consumer spending. This was indeed disappointing as strong consumer spending has
been one of Brazil’s few consistent engines for growth. Due to personal income growth and low
unemployment over the past few years, there has been a huge migration of millions of people
from below the poverty line to the middle class. Around 60% of Brazil’s Gross Domestic Product
(GDP) comes from domestic consumption.
Inflation is eroding purchasing power and rising prices have led to a drop in real wages, despite
record-low unemployment. With inflation at 6.15% in January 2013, the government may
increase interest rates earlier than expected to dampen prices. Which, unfortunately, will hit the
consumption story. This is bad news as manufacturing continues to stagnate due to weak global
demand and soaring labour costs.
A Financial Times blog presents the conundrum well. It quotes a Goldman Sachs report that
says that despite the slight loss of momentum in the last quarter of 2012, the retail sector
remains one of the most dynamic in the economy. But Capital Economics believes that the pace
of consumer spending growth in Brazil is unsustainable as is the rapid expansion of consumer
credit.
The government will have to find ways to fire up other engines of the economy, such as
investments. Thanks to the massive sports events to be held, there is considerable activity on
this front. The Brazilian Ministry of Sports has estimated that the economic impact of the World
Cup event alone over the period of 2010 and 2019 would amount to $27 billion of direct
investments in infrastructure, tourism and consumption, while the indirect investment would be
$135.7 billion. Employment generation and tourism will get a strong boost.
While both Brazil and India share a strong domestic consumption story, what makes Brazil an
interesting addition to one’s portfolio is the way that economy complements India. From an
investor’s point of view, investing in Brazil is taking a position on commodities. If one looks at
the BRIC countries, China and India have a great need for energy, metals and foodstuff, and
import much of the same. On the other hand, Brazil and Russia are best positioned to supply
such a need. Russia exports oil, natural gas, nickel and platinum group metals. Brazil is the
world leader in production of, or at least has a production surplus in, a number of hard and soft
commodities (iron ore, sugar, soybeans, coffee, corn, orange juice, beef, poultry).

2. British investor, Jim Slater, was known to have said that “Brazil is insulated against the world’s
main shortages – fresh water, agricultural commodities and energy.” It contains nearly a fifth of
the world’s fresh water, available to expand agricultural production and carbon-free electricity
generation. A sharp contrast to India.
The best way to understand how investment in Brazil can act as a hedge in an otherwise all-
India portfolio is to look at the impact of crude. Around two years ago, Goldman Sachs came up
with an interesting inference. It stated in its ‘Asia Economics Analyst’ edition that a VAR (value-
at-risk) analysis on India suggested that a $10 increase in oil would reduce GDP growth by 0.2%
while the current account deficit would rise by 0.4%. On the other hand, Brazil’s economic
growth would be supported with surging oil production and a rise in the price of crude would
benefit the country positively. Fast Market Research, in their latest Brazil Oil & Gas Report,
have stated that they are firmly bullish on the long-term outlook for the country’s energy sector
with production being pushed to new highs.
As an Indian investor, it would do well to have some global exposure in your portfolio. In this
regard, an investment in Brazil makes for a complementary fit. HSBC Brazil Fund is a fund-of-
funds (FoF) that invests in HSBC Global Investment Funds Brazil Equity Fund.
Our research team will be looking at this fund in detail in the coming days. Watch this space.
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Content Team,
Fundsupermart.com | iFAST Financial India Pvt Ltd.
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