Yoshikami: Brazil Rivals the Asia Opportunity

Brazil is an important economic story.

Yes, China is a growing force, but so is this powerhouse Latin American country.

Here's why.

Like all emerging markets, Brazil’s success story has a lot to do with its fast growing middle class, a key driving force behind the country’s economic growth. Brazil is not just about commodities but also a very strong domestic story. And returns have reflected the positive story. Over the last five years, the MSCI Latin American index gained an annualized 13 percent; the best performance of any emerging market region. And Brazil is a significant part of the returns in this region.

Sao Paolo, Brazil
Photo by: Robert Windrem
Sao Paolo, Brazil

Brazil’s economy grew 7.5 percent in 2010, its fastest rate in 25 years, putting it ahead of Britain and France to become the fifth-largest economy in the world.

Foreign investment in Brazil is also at a high as foreign money clamors to get a piece of the action.

According to Thomson Reuters, more than $13 billion of deals were aimed at Brazil – a 370 percent increase over the comparable period in 2010.

The government’s role in reducing poverty has led to an expansion of the middle class, with about 34 million Brazilians entering the middle class in the past five years. The country’s middle class now makes up 74% of the population, compared to just 49% in 2005, according to a report by Cetelem Bank. The Government’s ambitious social housing programs aim to build 3 million homes by the end of 2014. The emerging middle-class continue to spend with many buying their first washing machines, televisions and other domestic appliances.

Yes, Brazil has a lot going for it; it is a resource-rich nation and a dynamic hub of international trade.

However, Brazil faces many of the challenges confronting emerging market economies; the need to contain inflationary pressures and manage large capital inflows. President Dilma Rousseff earlier this week stated that she is "immensely worried with inflation". Her administration clearly needs to balance the need to fight higher inflation while at the same time embracing economic growth.

The strengthening Brazilian Real is also a concern. The Real has appreciated more than 15% over the past year and is near it's strongest level since the Real was freely floated in 1999. On the commercial real estate front, it is now more expensive to rent prime office space in Rio de Janeiro than in New York, according to property advisers, Cushman & Wakefield. A rapidly emerging middle class has put a huge strain on the country’s infrastructure; from the electricity grid to housing development.

Access: Brazil - A CNBC Special Report
Access: Brazil - A CNBC Special Report

Rapid growth has it's challenges to be sure.

Still, great opportunity exists in Brazil. Brazilian companies that are exposed to domestic demand will likely benefit from Brazil’s growing workforce, which had created 35 million middle class consumers in the space of six years.

Other numbers also tell the story. Grupo Po de Acar, Brazil’s largest retailing conglomerate, more than doubled its net income in the fourth quarter. The banking sector also posted its best earnings season with a close to a 20 percent surge in lending last year.

Government-controlled Banco do Brasil, Latin America’s largest bank by assets, reported its credit portfolio had grown 20.8 percent last year from 2009. Bradesco, the second-biggest private bank reported a 23 percent growth in loans that contributed to a 25 percent over the year increase in net income.

Brazil is growing into an economic powerhouse. It's not just about commodities. Not anymore. And investors should recognize that Brazil deserves a look as a way to diversify away from more traditional, debt burdened regions. As a tactical manager, we look for opportunities across the globe and we see promise in Brazil.

The world’s attention is guaranteed to be focused on Brazil in the coming years with Rio de Janeiro hosting both the World Cup in 2014 and the Olympic Games in 2016. Expect the region, and Brazil, to emerge from Asia's shadow and rightfully claim it's place as an emerging investment opportunity holding great promise.

Watch CNBC's special coverage, "Access Brazil,"Monday-Thursday, April 25-28. Maria Bartiromo and Michelle Caruso-Cabrera report from Brazil on Squawk On The Street, 9-11am ET, Power Lunch, 1-2pm ET and Closing Bell, 3-5pm ET on CNBC.

Watch CNBC's special coverage, "Access Brazil,"Monday-Thursday, April 25-28. Maria Bartiromo and Michelle Caruso-Cabrera report from Brazil on Squawk On The Street, 9-11am ET, Power Lunch, 1-2pm ET and Closing Bell, 3-5pm ET on CNBC.


Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at YCMNET Advisors. Founded in 1986, YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutional investors and individual investors. The firm works with clients around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009 and 2010. He oversees all investment and research activities of the firm and is actively engaged on a daily basis in the firm's securities analysis activities and determines the macro tactical asset allocation weightings for client portfolios. He works with YCMNET's investment team in integrating behavioral investing strategies with the firm's core fundamental perspective. Michael holds a Ph.D. in education, other advanced degrees, and holds the Certified Financial Planner® (CFP) designation.