Investors Love Rio: Why Foreign Companies Are Buying Into Brazil's Real Economy

Companies, especially Japanese companies, have underinvested in corporations in Brazil ... It's a cycle where investors tend to lead by buying first financial assets and then moving to the real sector. [The] Japanese have been the main buyer of securities linked to BRL [Brazilian real] -- Uridashi and Toshins -- for several years, and they are now moving into the real economy, Francisco Oliveira, head of Latin American fixed-income trading for BNP Paribas, said Friday.

The Brazilian equity market has dropped more than 10 percent this month and 15 percent in the second quarter, according to a Latin America report by Capital Economics released this month.

However, consumer demand has remained high despite troubles in the financial sector. As a result, a string of foreign companies have recently sunk money into Brazil's real economy, either buying stakes in Brazilian companies or purchasing them outright.

On Thursday, Fairfield, Conn.-based General Electric Co. (NYSE: GE) put $300 million into Eike Batista's EBX Group, which is involved in the energy, mining, shipping, and other industries in Brazil, Chile, and Colombia. Also on Thursday, Minneapolis-based General Mills Inc. (NYSE: GIS) said it would acquire the Brazilian food company Yoki Alimentos S.A., although the cost of the acquisition was not disclosed. On Friday, Osaka, Japan-based Takeda Pharmaceutical Co. Ltd. announced it would buy Brazilian Multilab for $265 million -- and the list goes on, stretching back months.

Several factors are bringing international dough to Brazilian companies, a big one being that Brazil still has a steadily growing economy in an era of shrinking or unstable economies in Europe and the U.S.

Brazil's economy probably grew by around 1 percent quarter-over-quarter in the first quarter of this year, said the Capital Economics report released this month. Year over year, the growth in Brazil's gross domestic product in the first quarter was 1.8 percent, a substantial drop from almost 10 percent in 2009, according to a recent report by Morgan Stanley. However, it is seen as being a relatively stable market.

Brazil's return to growth is clearly good news, the Capital Economics report said.

Brazil's Appeal

The prospect of stable growth makes Brazil particularly appealing to foreign companies that have ready cash to buy, as it allows them to expand in an economy that is seen not to be tanking. At least some of the investment money being directed to Brazil is the result of companies diversifying outside of the euro zone to escape the debt crisis there, according to Oliveira.

For cash-rich corporations, it makes a lot of sense to invest in Latin America, Oliveira said, adding that Brazil is particularly appealing as it is seen as adhering strongly to the rule of law.

The news that international companies are buying into Brazil may come as a surprise to some, given the drop in GDP growth since 2009 and the precipitous drop in value of the Brazilian real against the U.S. dollar in recent months. The value of the real has fallen 15 percent against the dollar since February: The dollar is worth 1.99 reals today, compared with 1.69 reals in February.

The fluctuation in value of the real has come as a result of inconsistent government policy. Whereas the government had previously targeted a weaker real, the central bank is now intervening ... to prevent its disorderly declines, the Capital Economics report said.

The Brazilian economy has continued to grow, albeit modestly, and it is drawing investors, despite its currency troubles, because of robust demand. While output in the nation has faltered, demand is still running high, according to Morgan Stanley. The government's moves to strengthen the real have simply continued to boost demand rather than bolstering output.

The weaker real has made dollar-denominated goods more expensive for Brazilians, but it has not substantially dampened demand. As Forbes columnist Ken Rapoza pointed out Thursday, the currency issue doesn't matter to Brazilians: Pent-up consumer demand is something everyone talks about in Brazil. The country is loaded with spenders, not savers.

A recent report from Business Monitor International predicted that Brazilian retail sales will grow 43 percent in the next four years as the emerging middle class gains credit and buying power.

Brazil has historically suffered from hyperinflation from time to time, which has conditioned people to spend their money as fast as they get it -- and, indeed, some economists worry that the government's efforts to stimulate the economy may create this kind of a situation again. For now, though, it's Buy, baby, buy, which continues to make the market ripe for international companies seeking exposure to it.