IPCA, IGP-M, IPC, INCC. How to make sense of Brazilian Inflation indexes?

IPCA (Índice Nacional de Preços ao Consumidor Amplo) – Broad National Consumer Price Index: Equivalent to the CPI in the US. This is the official consumer inflation index. Federal government uses it to set inflation goals. Current target is 4.5% with a margin of 2% higher or lower. The 2.5% – 6.5% IPCA range is targeted by the central bank when defining the interest rate, SELIC. The index is calculated by IBGE (federal geography and statistics institute) and tracks continuous and systematic variations in consumer prices for families with income up to 40 minimum wages. Data is collected in the metropolitan areas of Belém, Recife, Fortaleza, Salvador, Belo Horizonte, Rio de Janeiro, São Paulo, Curitiba, Porto Alegre, Brasilia and Goiânia. Data is collected between the first and last day of the reference month, and is disclosed between the 8th and the 12th of the following month.

 IGP-M (Índice Geral de Preços do Mercado) – General Index of Market Prices: Considered equivalent to the PPI – Producer Price Index, in the US. From Fundação Getúlio Vargas (a private entity), it was created to correct some treasury securities and floating-rate bank deposits with maturities over one year. Later, it started to be used for corrections of contracts such as real estate rent and electricity. Disclosed at the end of the reference month since the collection is made from the 21st of the previous month and the 20th of the month to which it relates. It consists of IPA – Wholesale Price Index (60%), IPC – Consumer Price Index (30%) and INCC – National Index of Construction Cost(10%). Every 10 days, it is disclosed a partial number known as IGP-10.

IPC – aka IPC-FIPE – (Índice de Preços ao Consumidor) CPI – Consumer Price Index: This is the inflation index for the city of São Paulo, largest city in Brazil. FIPE (a foundation linked to USP – University of São Paulo) measures the IPC based on a consumer with income between 1 and 20 minimum wages. The basket of products and services tracked is based on the POF – Household Budget Survey from IBGE, constantly updated. The survey is conducted between the first and last day of the reference month and published between the 10th and 20th of the following month. It is the most traditional cost of living indicator for the families in São Paulo and one of the oldest in Brazil, since January 1939.

INCC-DI (Índice Nacional de Custo de Construção, Disponibilidade Interna) – National Index of Construction Cost, Internal Availability: From Fundação Getúlio Vargas (private entity) in partnership with Caixa Economica Federal (public company), measures the cost of new housing in 18 cities: Aracaju, Belem, Belo Horizonte, Brasilia, Campo Grande, Curitiba, Florianópolis, Fortaleza, Goiânia, João Pessoa, Maceio, Manaus, Porto Alegre, Recife, Rio de Janeiro, Salvador, Sao Paulo and Vitoria. This is one of three items that comprise the IGP – General Price Index, with 10% weight. It is measured between the first and last day of the month and released about 20 days later. There is another number (INCC-M), calculated between day 21 of the previous month and the 20th of the month in reference for the composition of the IGP-M.

Braskem: Largest Petrochemical in Latin America

Braskem is Brazil’s largest integrated petrochemical cracker and thermoplastics maker. The company produces a portfolio of petrochemical products including ethylene, propylene, butadiene, toluene, xylene, benzene, gasoline, diesel oil, liquefied petroleum gas (LPG), as well as thermoplastic resins, such as polyethylene (PE), polypropylene (PP) and polyvinyl chloride (PVC). As of December 31, 2011, the Company had 35 industrial units, including 28 in Brazil, five in the United States and two in Germany. Additionally, it is engaged in the import and export of chemicals, petrochemicals and fuels. The Company divides its activities into five sectors: Basic Petrochemicals, Polyolefins, Vinyls, International Businesses and Chemical Distribution. As of December 31, 2011, the Company had a number of subsidiaries in Brazil, the United States, Argentina, Chile, Netherlands, Germany, Cayman Islands, Mexico, the British Virgin Islands, Bahamas and Uruguay.

ADR Ticker BAK
Website http://www.braskem.com.br/site.aspx/Investors-USA
Industry* Commodity Chemicals
Bovespa Ticker BRMK5
EBI Rating 3-star

Got MIlk? Got Meat? BR Foods has strong brands in the meat processing and dairy industry in Brazil

BR Foods owns three very strong brands in the food market in Brazil: Perdigão, Sadia and Batavo. With more than 55,000 employees, it is one the largest Brazilian processed food companies. Its international operations reach more than 140 countries. The firm sells over 3,000 products both domestically and abroad, with a focus on the sale of processed food products, poultry, pork, beef, and dairy products.

Sadia and Perdigão are in the processed meat industry and used to be the two major players in the market until they merged in 2008, creating Brazil Foods. Batavo is the leading brand in dairy products in Brazil.

In a scenario where the middle-class is growing quickly in Brazil, BR Foods is well positioned to take advantage of this growing demand.

Also, BR Foods brands should allow it to pass to the consumers the rising costs from agricultural commodities, thus providing a nice inflation hedge.

Below is the full list of products BR Foods sell in Brazil and abroad (click the images to enlarge):

BRFS Products Brazil
BRFS Products Export
Easy Brazil Investing Rating
Brasil Food’s competitive advantage is built on its brands, distribution network and scale. All these factors along with the exposure to fast-growing markets, grant BRFS the 5 star EBI Rating.

BRF-Brasil Foods S.A.

ADR Ticker BRFS
Website https://www.brf-br.com/ri/
Industry* Food Products
Bovespa Ticker BRFS3
EBI Rating 5-star

Brazil-focused ETFs to invest directly from NYSE

If you want to get exposure to Brazil in a diversified manner, ETFs are the easiest way. If you have an account through which you can trade ETFs from the New York Stock Exchange (NYSE), you can invest in Brazil right away.

Here I will list six ETFs for you to get started. If you prefer investing on individual stocks, you may want to check these Brazilian Companies.

iShares MSCI Brazil ETF (EWZ)

This 15-year old ETF, introduced in July 14, 2000 has gathered more assets than any other non-US, single-country ETF. It currently has over $6 billion under management. iShares Brazil tries to replicate the MSCI Brazil index and as such, it is highly exposed to the Brazilian Large Caps: Petrobras, Vale, Ambev, Itau Unibanco and Bradesco.

Over the past 10 years, EWZ has risen almost 300%, while the S&P 500 is pretty much breaking even.

While these blue-chips do provide good scale and less volatility than it’s smaller counterparts, this ETF is highly exposed to commodities producers: Petrobras, Vale, OGX Petroleo, CSN and Gerdau. That obviously brings volatility. On the other hand, iShares Brazil gives long term investors a good inflation hedge as it will benefit from commodities prices spike. In a world where emerging markets keep growing, albeit slower, commodities prices tend to go up as basic needs such as food and energy are the first ones purchased by the emerging middle-class.

When you buy this fund, you are basically long the world’s low-middle-class.The one that buys its food, can afford its house, basic appliances and perhaps a car. They will not spend on fancy, expensive gadgets or on the dream holiday.

Well, if you are long that low-middle-class you should know they are growing fast. Countries like China, India and Brazil are growing between 5% and 10% and the ones getting the most advantage of this growth are the “new middle-class”. Recent growth deceleration in these countries present a good buying opportunity for the patient investor.

Global X Brazil Mid Cap ETF (BRAZ)

This fund is more recent and started trading June 2010. The investment seeks to provide investment results that correspond generally to the price and yield performance of the Selective Brazil Mid Cap index.

While the large caps in Brazil are highly tight to the world’s economy, these mid-cap companies are more targeted to the internal market.

Market Vectors Brazil Small-Cap ETF (BRF)

If you want to get even further exposed to Brazilian internal market, this fund is for you. The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Brazil Small-Cap Index

This fund is older and has more assets than the mid-cap focused BRAZ. With $1.2 billion under management BRF’s liquidity is still not so high though. On top of that, some of its investments don’t have that much liquidity either.

If you want to get exposure to the domestic economy though, nothing is better than BRF.

EGS INDXX Brazil Infrastructure ETF (BRXX)

The fund seeks investment results that generally correspond (before fees and expenses) to the price and yield performance of the INDXX Brazil Infrastructure index.

With the Olympics fast approaching, infrastructure investment will be priority in the next 12 months. But here again, BRXX’s low liquidity is a concern as well.

ProShares Ultra MSCI Brazil (UBR)

If you want to go all-in on Brazil, UBR is the ETF for you. The investment seeks daily investment results that correspond to twice (200%) the daily performance of the MSCI Brazil Index.

To achieve that, UBR uses leverage, which obviously increases its risk so be careful before investing in this one. It does provide a nice beta for your buck, though.

ProShares UltraShort MSCI Brazil (BZQ)

During some periods of time, you may feel you have too much exposure to Brazil or you just want to bet on a drop. BZQ seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Brazil Index.

Again, use leveraged ETFs with care. If you believe in a continued meltdown of emerging markets, this ETF is a good candidate for you since its double downside exposure to the commodities-heavy MSCI Brazil gives you a good beta.

Investing in Bradesco: building on its presence

Bradesco is the third-largest bank in Brazil. Unlike in most developed countries where small banks and credit unions are always present, in Brazil, the bank industry has a well-established oligopoly, where the 4 major banks have around 70% of the market share together. This oligopoly along with the high switching-cost in the bank industry gives these 4 banks a good pricing advantage.

The bank industry in Brazil is also conservatively regulated and highly lucrative, with spreads north of 10%. These two factors reduce considerably the risk for small investors in these banks.

Bradesco has over $800 Billion in assets. Its main two segments are banking and insurance, with each contributing almost equally to the company’s bottom-line.

With 4600 branches throughout the country, Bradesco is the only of the major banks to be present in every city in Brazil. This strong presence will allow Bradesco to take advantage of Brazil’sgrowth over the next decades.

Easy Brazil Investing Rating

Bradesco’s competitive advantage is built on its presence, brand, scale, high switching-cost and the oligopoly in the industry. These factors along with the exposure to a fast-growing market, grant Bradesco the highest EBI Rating: 5 stars.

Banco Bradesco S.A.

ADR Ticker BBD
Bovespa Ticker BBDC3, BBDC4
Latibex Ticker XBBDC
Website http://www.bradescori.com.br/site/conteudo/home/default.aspx?idiomaId=2
Industry* Banks, Insurance
EBI Rating 5-star

Santander Brasil: Decent Investment with potential mid-term upside

Santander is the fourth-largest bank in Brazil. Unlike in most developed countries where small banks and credit unions are always present, in Brazil, the bank industry has a well-established oligopoly, where the 4 major banks have around 70% of the market share together. This oligopoly, along with the high switching-cost in the bank industry, gives these 4 banks a good pricing advantage.

The bank industry in Brazil is also conservatively regulated and highly lucrative, with spreads north of 10%. These two factors reduce considerably the risk for small investors in these banks.

Santander Brasil has around $200 Billion in assets and 2,000 branches. While it still does not have the profitability shown by Banco do Brasil, Itau Unibanco and Bradesco; Santander’s forecast is to grow its credit portfolio faster than the competition in the next years and reach that level of profitability. Because that profitability is currently not built into the stock price, if they really deliver what they are promissing, the stock will adjust considerably in the next years. That has proven to be hard to achieve in the recent years though.

Easy Brazil Investing Rating

Santander benefits from the banking industry fundamentals in Brazil that is very favorable with high switching-cost, oligopoly, conservative regulation and high spreads.

These factors along with the exposure to a fast-growing market, gives Santander a solid investment case which receives the 4 stars EBI Rating. In the banking industry, Itau Unibanco and Bradesco still has a better rating due to their higher profitability and larger scale.

Banco Santander Brasil S.A.

ADR Ticker BSBR
Bovespa Ticker SANB11, SANB3, SANB4
Investor Relations Website http://www.ri.santander.com.br/Default.aspx
Industry* Banks, Insurance
EBI Rating 4-star

Ambev: Great Long-Term Investment. Cheers!

Ask any Brazilian what is their favorite beer and you are likely to get one of these three answers: Skol, Brahma or Antarctica. Since we are talking about Ambev in this post, you must be guessing Ambev owns Skol, which is the dominant beer brand in Brazil. That’s partly right. Ambev does own Skol. But Ambev also owns Brahma and Antarctica. That’s right: they own all three dominant beer brands in Brazil. Together, these three brands have around 70% of the market share in Brazil. On top of that, the brand preference by the consumers’ taste gives Ambev a good pricing power and they have been able to smoothly pass cost increases to the consumers and to keep margins up.

Ambev also owns Premium brands like Antarctica Original and Bohemia. Premium beer has a good growing outlook in Brazil and Latin America over the next decades due to the growing countries’ middle-class.

Ambev is present in 14 countries in the Americas and they lead in 6 of the countries where they operate: Brazil, Argentina, Canada, Paraguay, Uruguay and Bolivia.

They also distribute Pepsi and Quilmes in most countries in South America, Budweiser in Canada and Brazil and Stella Artois in South America and Canada.

Easy Brazil Investing Rating

Ambev’s competitive advantage is built on its brands, distribution network and scale. All these factors along with the exposure to fast-growing markets, grant Ambev the highest EBI Rating: 5 stars.

Ambev – Companhia de Bebidas das Américas

ADR Ticker ABV, ABVC
Investor Relations Website http://ir.ambev.com.br/default_en.asp?idioma=1&conta=44
Industry* Brewers
Bovespa Ticker AMBV3, AMBV4
EBI Rating 5 Stars

 

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