WASHINGTON—According to a key market index, Brazil has edged past China to become the largest emerging market in the world.
In late February, Brazil achieved a 14.95 percent rating on the MSCI GEM index of global emerging markets, ahead of China's 14.15 percent rating. The MSCI index is a brainchild of Morgan Stanley Capital Group Inc. (MSCGI), and benchmarks the earning power of stocks offered for investment purposes instead of a composite of all stocks traded on stock exchanges.
Many fund managers benchmark their emerging markets portfolios against he MSCI GEM index, and a top ranking could mean more investment dollars flowing into Brazil.
When one looks at the composite of all traded companies, however, Brazil is dwarfed compared to China. As of 2008, the value of all companies listed on China's Shanghai and Shenzen exchanges topped $3,900 billion, around three times the market cap of shares listed on the São Paulo exchange.
But recent market performance and its democratic system have analysts bullish on Brazil. "Since emerging market equities peaked at the end of October, Chinese share prices have fallen by 28 percent. Over the same period, Brazilian shares have gained 4.5 percent," according to a press release from the Brazilian-American Chamber of Commerce.
Analysts are warning their clients not to jump the gun. "It's inconceivable that you could have the U.S. economy in recession and a world economy that ignores that. Our concern is that commodities will start to correct," suggested Geoffrey Dennis, strategist at Citigroup, Inc., in the press release.
In January of this year, foreign investments into Brazil almost doubled compared to the same month last year, amounting to almost $5 billion, according to statistics from Banco Central do Brasil, Brazil's central bank. Total foreign investments in Brazil exceeded $36 billion during the past twelve months.
Brazil Edging into World Class
Brazil has edged up to become the sixth largest economy in the world, according to a recently-released World Bank study. Despite a business slowdown in the South America region, Brazil grew at an accelerated pace.
"In 2006, it [Brazil] was the third-largest economy in the western hemisphere and the eleventh largest in the world," said University of Pennsylvania professors in a recent Knowledge@Wharton (KW) article "Why Brazil has Become One of the Tope Four Investment Destinations in the World."
Although the majority of Brazilian companies have not caught up to the technological standards employed by firms in the United States and Europe, "the most sophisticated firms [in Brazil] use technologies and achieve levels of productivity that rival world leaders," said World Bank's researchers in a recent study titled "Global Economic Prospects 2008."
Brazil's companies produced 10 percent more goods in 2007 compared to 2006, making it the second fastest growing in the Latin American and Caribbean region, after Colombia's 13 percent.
The Brazilian trade surplus (as measured by net exports) is shrinking, as Brazilian consumers acquired a taste for foreign products. Imports grew by more than 30 percent, while exports only grew by around 16 percent in 2007 over the prior year, according to statistics released by the Brazilian Ministry of Development, Industry and Foreign Trade.
The 2007 U.S. housing market crisis largely left companies in Brazil and other Latin American countries unaffected, suggesting that these markets have learned their lessons from past global market disruptions and have become resilient, according to the World Bank.
"Brazil's credit markets are shrugging off the effects of the U.S. subprime mortgage debacle and maintaining business largely as usual," said Antonio Quintelly, head of Credit Suisse Brazil in an interview with the Financial Times.
Still a Long Ways to Go
Brazil's abundance of natural resources such as oil, natural gas, bauxite, nickel and iron ore makes it a desired trading partner for resource hungry countries.
The size of Brazil's uncultivated land also makes it a great place for forestry and agricultural ventures, including sugarcanes for ethanol production, according to a number of articles on Brazil published by McKinsey Quarterly, the publishing arm of McKinsey & Company, a New York-based think tank.
Brazil's workforce earn around 40 percent less than their counterparts in the Unites States, making it an outsourcing and offshoring destination. Its comparatively lower living cost and availability of space is another plus for foreign businesses.
As with any emerging market, there are risks. Can Brazil's bright potential overcome inefficiencies that can still haunt its business environment? One example is the tax burden that has grown to 36 percent since the mid-1990s. In addition, tax regulations have become overly cumbersome and complicated, making it difficult to navigate the country's tax and regulatory environment. In addition, "inflexible labor laws, cumbersome regulations for starting businesses and fluctuating currencies" continue to haunt foreign businesses, suggested McKinsey.
Another major problem for global companies is the small "pool of workers suitable for employment by multinationals," according to McKinsey. Only a little more than 10 percent of Brazil's college graduates—most of them from the engineering, accounting and finance fields—have the necessary English proficiency and international exposure.
Brazil's infrastructure is still in its infancy with an outdated transportation network. "Bad roads, storage facilities and port infrastructures lead to the spoilage of 3 to 12 percent of Brazil's grain production before it reaches the country's consumers," says McKinsey.
Brazil's legal system also needs improvement. According to McKinsey, "A slow and unpredictable judicial process, with high rates of appeal and many reversed rulings, is bad for business, since an uncertain legal environment can make executives shelve investments they would otherwise have made."
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