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On Sept. 9, Standard & Poor’s downgraded its credit rating on Brazil to junk (BB+) with a negative outlook. Gone is Brazil’s much-prized investment grade rating (BBB-) . . . washed away by scandal.
In its statement, S&P specifically pointed to the ongoing political turmoil in the country as a key reason for the downgrade.
Much of that turmoil is a result of the nation’s biggest scandal in history. This scandal involves not only the country’s political elite, but also its corporate elite. The scandal’s starting point was Petrobras S.A. (NYSE: PBR). But it has now spread to Electrobras S.A. (NYSE: EBR), Odebrecht and others.
The downgrade strikes another blow to the political fortunes of President Dilma Rousseff and her leftist Workers Party. Rousseff is already attempting to fight off a petition filed in the Brazilian Congress for her impeachment.
It’s not just politics that ails Brazil.
Worst Recession in 25 Years
The economy stinks too. Brazil’s GDP contracted by 1.9% in the second quarter, which was worse than expected. Brazil’s currency, the real, is down nearly 70% over the past year. It is approaching its all-time low set in 2002.
Unemployment is rising too. The rate was 8.3% in the second quarter, up from 6.8% a year earlier. Nearly 900,000 jobs were lost in July alone.
Fewer jobs means less spending. Retail sales in July fell 3.5% year-on-year. Brazil’s consumer confidence continues to plumb new lows month after month.
Overall, the economy is expected to contract by about 3% this year. And growth is expected to be negative again next year, with minus 2% expected.
The reasons behind the economy’s decline include the scandal, the slowdown in Chinese demand for Brazilian commodities, and Rousseff’s inept leftist policies.
Her policies will leave Brazil with a budget deficit next year, even if interest payments are excluded from the calculation.
And if another credit agency downgrades Brazil – which is likely – many international investors will be forced to sell their Brazilian holdings. About 20% of Brazil’s debt is owned by foreign investors.
Bottom line: many are calling this Brazil’s worst recession since the Great Depression.
Brazil is one of the BRIC countries (Brazil, Russia, India, China). But the B right now could just as easily mean “bust.”
Brazil Only for Value-Oriented Contrarians
In my earlier look at Brazil, I said that it was a market for contrarian investors with a value bent, ala the legendary Sir John Templeton.
And indeed these types of investors are starting to nibble in Brazil stocks.
Some companies are taking advantage of depressed stock prices to buy out locally listed subsidiaries. One company that followed this path is British American Tobacco (NYSE: BTI).
Private equity firms are also finding good hunting in Brazil. They invested $2.3 billion into Brazilian companies in the first half of 2015. That is 20% more than all of 2014.
I would stick with the two individual Brazil stocks I named in my previous article, Ambev S.A. (NYSE: ABEV) and Adecoagro S.A. (NYSE: AGRO).
Ambev is the Brazilian subsidiary of the very acquisitive Anheuser-Busch InBev (NYSE: BUD). I like BUD’s aggressive CEO, Carlos Brito. And that’s not to mention that Ambev is a very cheap way to get exposure to 3G Capital and Jorge Paolo Lemann.
Adecoagro is a rarity – a Brazilian stock that is actually up 8.25% this year. It owns farmland in Brazil and neighboring Argentina and Uruguay. It produces more than 1.3 million metric tons of agricultural products annually.
And famed investor George Soros is involved. He owns nearly 26 million shares of the company. It makes up about 4% of the portfolio of Soros Fund Management.
Accumulate these Brazil stocks in a gradual fashion, slowly building your position. The 2018 election in Brazil will come sooner than you think. Rousseff will be gone and the economy will again look brighter for the B in BRIC.
Wars will be fought over this
Over the last 15 years, one resource has caused more than 500 conflict-related events…11 of which have turned violent. What’s more, the British non-profit International Alert estimates that there could be 46 conflicts within the next 10 years…all related to this scarce resource. And some of the wealthiest insiders—Warren Buffett, Goldman Sachs and JP Morgan—are moving to profit from it right now. Go here to get the full story.