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Investing In Brazil: What You Need To Know

Manoj Singh, 04.30.10, 07:31 PM EDT

How to invest in this emerging market.

In a world full of undiscovered prospects, it is never too late to try something new. Investors now looking for alpha and beta can think about adding a little bit of samba to their portfolio. With a steadily growing economy, a stable financial market and a liberal investment climate, Brazil has the potential to emerge as the dark horse in the race among emerging markets. But for that, Brazil just needs to continue on its present course without doing anything dramatic. Read on to find out what Brazil has to offer for the global investment community.

Two Options for Getting Your Feet Wet
International investors have two options for investing in the Brazilian stocks. The first option is to go straight to the place of action by investing in stocks listed on the Brazilian stock exchange. The second option is to try
the offshore investment route available in the form of American depository receipts (ADRs), global depository receipts (GDRs), exchange-traded funds (ETFs) and mutual funds focused on Brazil or Latin America. No matter which option you choose, it's important to learn more about this exciting location.

An Overview of the Brazilian Economy
The Brazilian economy is the 10th largest economy in the world. During the period 2004-08, the economy grew at the rate of 4-5%on average. Many would consider this growth rate to be less impressive than rates seen in China and India, but Brazil nevertheless continues to be an investment hotspot. Brazil is one of the few countries in the world that is self-sufficient in oil, which plays a very crucial role in global economy. Brazil is also a leader in alternative energy sources; it produces more ethanol than the combined production of Asia and Europe. Brazil is also the second largest producer of iron ore in the world.
With this abundance of natural resources, Brazilians are manufacturing everything from aircrafts to hair pins. The decades of hyper-inflation and unstable domestic currency seem to be over. There is a long list of positive points that make Brazil a promising candidate for spectacular growth.

A Stock Market with its Own Megabolsa
Brazil has one of the most sophisticated stock exchanges called BM&F Bovespa which was created in 2008 by the merger of the Brazilian Mercantile & Futures Exchange (BM&F) and the Sao Paulo Stock Exchange (Bovespa). The Sao Paulo Stock Exchange was established in 1890. The integrated BM&F Bovespa offers a host of products for trading such as stocks, ETFs, futures, commodities, forwards, options, corporate and government bonds, etc. Nearly 450 firms are listed on Bovespa. All trading in equity and equity derivatives take place at Bovespa on an order driven electronic trading platform called Megabolsa. The second largest stock exchange in Brazil is the Rio de Janeiro Stock Exchange (BVRJ) which trades in government bonds and currencies.

 Trading Mechanism at MM&F Bovespa
All transactions of buying and selling of equities are electronically processed by Megabolsa. Before commencement of the regular trading session there is a 15-minute pre-opening phase in which orders are placed in the system for establishing the opening price ("opening calls"). During the last five minutes, there are "closing calls" for all stocks comprising indexes.

Investing in Brazil for Outside Investors
Brazil has one of the most liberal investment climates for outside investors. Non-resident investors, both individuals and legal entities, can invest in most of the financial and capital market instruments available to resident investors, without any restrictions. However, non-resident investors are required to hire local entities to act as custodian and representative for regulatory and tax related issues. Investors are also required to complete other formalities like registering with the Brazilian Central Bank, the stock market regulator CVM and the Federal Revenue Service.

Investors desiring a shorter route can use the option of operating as participants ("passengers") in collective accounts registered in the name of some other investor. All funds coming in and going out of Brazil must be registered at the Central Bank through declarations submitted through electronic means. For placing orders on the stock exchange, you also need to select a member brokerage firm of BM&F Bovespa. Most of the financial institutions located in Brazil provide diverse services pertaining to registration and investment under the same roof.

Offshore Investment Opportunities
In case you are not yet ready for the direct route, you can think of using some of the options available closer to home. Outside investors can invest in the underlying stocks of some of the well known Brazilian companies by investing in ADRs listed in American stock exchanges and GDRs listed in European markets. In the future we may see the number of ETFs based on Brazilian stocks increase by leaps and bounds. One of the most prominent Brazil ETFs is iShares MSCI Brazil Index Fund ( EWZ - news - people ), which is listed on U.S. Amex Exchange and tracks stocks constituting the MSCI Brazil Index--covering about 85% of the total market capitalization.

Brazil, just like other emerging markets, seems to be well positioned for new growth opportunities. For directly investing in Brazil one needs to comply with various regulatory procedures of Brazil. The offshore investment route provides opportunities for investing in Brazilian stocks through ADRs, GDRs, Mutual Funds and ETFs available in global markets. The options available for making investments in emerging markets seem to be increasing every day. It would be a good idea to do some more research of your own before choosing any option.

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1 comment:

  1. Thanks for the interesting read! Here is another interesting article on investing in Brazil that perhaps first time investors should consider. Check it out!


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