White says that Brazilian banks are doing more large-scale lending and are issuing more credit cards to bolster consumer purchasing power. He adds that lower inflation and greater personal income are supporting a burgeoning home building industry that's tapping into pent-up demand.
Along with Petrobras and Vale, one of the largest holdings in the T. Rowe Price Latin America fund is Banco Itau Holding Financeira, a $60 billion market cap bank with loan book growth north of 20% and no exposure to the subprime loan mess, and which recently traded at about 12 times forward earnings estimates.
Banks are a favorite Brazilian domestic play for William Landers, manager of the BlackRock Latin America fund. He says the group's leaders have loan book growth exceeding 20% over the past several years and generate returns on equity of roughly 30%. They're also involved in other profitable business lines such as insurance and asset management. Landers' top banking pick is Banco Bradesco, the country's largest private-sector bank.
Landers says the real estate sector is primed for significant growth over the next decade, and he likes Cyrela Brazil Realty, Brazil's biggest developer that's involved in all facets of real estate from low-end to high-end. Elsewhere, he likes Usinas Siderurgicas de Minas Gerais, a steel maker with a majority of sales geared toward the domestic market in such products as white goods and autos. It became more self-sufficient after it recently bought its own iron ore mines in Brazil. "That's attractive," Landers says, "given rising iron ore prices."
A Relative Value
There's a sizable disconnect between the performance of the Bovespa index and the country's economic growth numbers. As the Bovespa shot to the moon during the past five years, the country's gross domestic product grew an annual average rate of 3.4% between 2002 and 2007. Last year it topped 5%. That's decent growth, but it's the smallest rate among the BRIC countries, and it even trails South American neighbors Colombia and Peru (granted, they're working from smaller bases).
The Brazilian market's rise is giving some investors pause. "Right now we're not finding a lot of things to own because of valuations and market uncertainty," says Landesman from ING. Two of his recent favorites were Banco Bradesco and Cosan, a leading global producer of sugar and ethanol.
"I like the Brazilian story," Landesman says, "but it's a matter of waiting to add things opportunistically."
Other investors are less reticent. Landers from BlackRock says Brazil's growth rate won't approach those of China or India because of infrastructure bottlenecks. "In the Brazilian GDP one area that's not getting a lot of growth is in government spending," he says. "They're keeping their accounts in line, and there's not a lot of money left over for government investments."
But Landers doesn't see that as a major problem. "The private sector is growing nicely and the domestic consumption story is really leading the way. The country can stay in the 4% to 5% growth range for the foreseeable future."
Emerging markets analyst David Riedel touts the Bovespa's trading multiple of about 12.5 times 2008 earnings, which is comparable to the Russian market and significantly cheaper than China or India.
"Some people would say, 'you have 5% GDP growth and inflation concerns, so maybe you need a better valuation than 12 times,'" Riedel says, adding that Brazil's solid macro fundamentals and its roster of companies with strong ROE growth makes for a compelling emerging market investment.