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Investing in Brazil
There are four basic options for a foreign individual to invest in Brazil
.
1) Investing in ADRs of Brazilian public companies that are listed on the NYSE.
2) Investing in Brazilian money market funds through a Brazilian bank.
3) Investing directly in Brazilian companies through a Brazilian brokerage firm.
4) Investing in Brazilian real estate.
In this article I will discuss the first two items in the above list. I will write about the
others in future articles
The CPF Number
If you are not a Brazilian citizen or do not have a permanent visa to live in Brazil
the last three of the above options require you to acquire a CPF number from the
Brazilian Receita Federal (Brazilian version of the IRS). The CPF number is
required for almost any financial transaction in Brazil and is used by the Receita
Federal to insure that everyone pays their taxes. The tax collection system very
efficient system because almost all financial transactions are registered and
linked to the CPF number. A CPF number can be acquired through a Brazilian
consulate office in your country. The process is not difficult. With a CPF number,
you can legally open a bank account, a brokerage account or purchase real
estate in Brazil.
Investing in ADRs of Brazilian public companies that are listed on
the NYSE
This option is the simplest. It only requires a brokerage account with an American
firm such as Merrill Lynch. Most of the large Brazilian blue chip companies have
ADRs that trade on the NYSE. You can go to (www.adr.com) and see a complete
list. You can also go to (www.yahoofinance.com) and by typing in the symbol for
any of these companies, get a quote and also access the news group for the
stock. Yahoo news groups are an excellent source for links to information about
these companies. You can also find a link to a company's official web site at adr.
com or yahoo finance.
Investing in Brazilian money market funds through a Brazilian
bank.
The simplest direct investment in Brazil is through a bank money market fund.
Money in Brazil is very expensive. This means that your cash can earn a high rate
if interest on Treasury Bonds or Bank CD’s. Current rates are about 16% per
year. The way to make this type of investment is by opening a bank account with
a Brazilian bank. Once you have funded your bank account the bank can offer
you an assortment of money funds. These funds are very liquid. You can put
your money in one day and take it out the next if you wish. There are no
commissions and the administrative fees are reasonable.
Remember that these funds are denominated in Brazilian reais. When you deposit
funds in your Brazilian bank or brokerage account they are converted into reais at
the current exchange rate. When you withdraw money it is converted back to
dollars at the exchange rate at the time of the withdrawal. Your investment return
will depend on both the interest rate and the exchange rate variation. Last year
(2005) the average interest rate was about 19% and the real gained 14% against
the dollar. This means that the total return dollars for this type of investment was
about 33%.
A strategy that an American investor with a brokerage account in the US
could use with a Brazilian bank money market fund is illustrated by the
following example.
A US brokerage account with a value $200,000.00 has an available margin
withdrawal of $100,000.00 If the investor were to withdraw the $100,000.00 from
his brokerage account and invest it in a Brazilian money market fund he could
increase the yield on his total funds by half of the difference between the margin
interest rate and the yield on his money market investment. In 2005 US margin
rates were about 6% and Brazilian bank money market rates were about 19%.The
difference, 13%, would accrue to the investors account. Also the 14% devaluation
of the dollar against the real would accrue to the investor's account giving him a
total gain of 27% or $27,000.00 on his $100,000.00 investment.
If the investor had the $200,000 in the DJIA, his result for the year would have
been a 0.14% loss shrinking his portfolio to $199,720.00. However, with
$100,000.00 of margin credit invested in the Brazilian money market he would
have earned a $27,000.00 profit, giving him a year end total value of $226,720.00
or 13% gain.
A real time example of an investment
That was last year. One could ask "does this opportunity still exist?". We have a
friend who made an actual investment in the Banco Bradesco Long/Short fund on
April 10 of this year. We put the data for this investment into an Excel Spread
Sheet and we will update it each month and make it available on this site.
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