China Vs. Brazil

 

China's economic prowess is well documented. But as Louis Basenese explains, while China represents a compelling investment opportunity, it isn't necessarily the best one. He notes some striking differences between Brazil and China. And explains why he favors Brazil in a head-to-head battle with China.

 

Forget China... It's Time to Bank on the Brazilian Consumer

Louis Basenese
Small Cap and Special Situations Expert

Hundreds of millions of Chinese citizens are on a crash course with the middle class.

A study from The McKinsey Quarterly supports this well-documented phenomenon, which estimates that it will take two decades before the Chinese nouveau riche reaches its full spending potential.

 

In turn, they're convinced that decades worth of profits are up for grabs.

I'm not about to refute that claim here. But instead, I want to caution you: Don't be blinded by the euphoria over Chinese consumers and overlook an equally compelling opportunity in another emerging market.

Let's head down to Brazil and I'll explain why - along with the best way to profit, of course...

Sizing Up the Profits in Brazil

Okay, I get that the scale of the Chinese opportunity - a population of 1.31 billion people, compared to Brazil's 192 million citizens - dwarfs Brazil's. But that doesn't mean the profit potential is any less.

On the contrary, in fact... I'd actually say it's greater when it comes to tapping into a blossoming middle class. In this regard, Brazil boasts several notable advantages over China...

• It's a democratic nation, not a communist one.
• Its population is much younger - the median age is 28.3, compared to 33.6 in China.
• Brazil is far less reliant on exports. Only 14% of Brazil's GDP comes from exports, compared to 35% from China.
• It already possesses all the natural resources necessary (and then some) to support its booming economy. Meanwhile, China needs to go out and gobble up foreign assets to ensure it can keep feeding its economic machine with enough oil, gas, coal, iron ore, etc.

But most important of all is the cultural difference. The Chinese are notorious savers, yet Brazilians love to spend, spend, spend. And don't just take my word for it. As Illan Goldfajn, Chief Economist at Brazilian bank, Itaú, reveals, "If the world is looking for savers, Brazil is not much good... But if it's looking for consumers, then we might be able to help."

Conspicuous Consumption, South of the Equator

Like China, Brazil's economy is also expanding at a healthy clip. GDP growth this quarter is expected to check-in at a tidy annualized rate of 9%.

As a result, unemployment is falling and incomes are rising. And that's leading to an explosion in the middle-class.

Over the last four years alone, Brazil's middle class has swelled by 24%, lifting roughly 20 million people out of poverty, according to Brazil's Census Bureau.

Furthermore, PriceWaterhouseCoopers Consultancy expects this rapid increase to continue. So much so, in fact, that it will propel Brazil's largest city, São Paulo, from the forty-sixth spot on the world's wealthiest city list to fifth place in a little over a decade.

And I have no doubt all that newfound wealth will quickly be spent. Because it already is being spent! Consider this...

• High-end jeweler Tiffany & Co. (NYSE: TIF) boasts more stores in São Paulo than anywhere else in the world.
• Handbag maker, Louis Vitton earns some of its highest profits per square foot in Brazil.
• And consumer credit use is up roughly 30% per year for the last three years.

And despite all this, Brazil's consumer-spending boom is still in its infancy. Thanks to a surging economy and stable inflation, we can expect more and more Brazilians to be able to afford their first mobile phones, cars, even homes in the years to come.

And if you want to know the hands-down, best way to profit from this trend, here it is...

How to Add Some Brazilian-Style Swing to Your Portfolio

Go with small caps.

I say that because the majority of the companies in Brazil's small-cap sector cater to domestic consumers (either directly or indirectly).

We're talking about businesses like...

• Banks
• Homebuilders
• Department stores
• Telecoms
• Airlines

These industries are destined to profit the most - and in turn, witness the most appreciation in stock prices, as conspicuous consumption takes root south of the equator.

And for you naysayers and China lovers out there, the stats back up my claim that Brazil is a better place to profit right now. Brazilian stocks are up 128% this year, compared to a 62% rise for Chinese stocks, based on the MSCI/Barra indexes.

Momentum is squarely on our side. So don't fight it... embrace it!

Thanks and Regards,

Navneet Singh Chauhan.