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Bet on Brazil: 3 Prudent Choices

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In December last year, Brazil’s economy posted its worst quarterly performance in four years. The economy shrank by 0.5% compared to the third quarter, or by 1.9% on an annualized basis. This was an indication of the challenges the country has been facing for some time now.

Brazil’s Challenges

Growing by 7.5% in 2010, the country’s economy had become a favorite destination for global investment. Since then, Brazil’s fortunes have declined rapidly due to several factors. These include fiscal profligacy, infrastructural bottlenecks and excessive red tape. For instance, the state has set price ceilings on fuel to curb inflation. This, in turn, has a detrimental impact on the fortunes of government owned Petroleo Brasileiro S.A (PBR - Free Report) .

However, steep inflation continues to be the greatest of the country’s woes. A series of rate hikes since April last year have reduced the rate of price rise to their lowest point in a year. However, inflation still remains significantly higher than the official target center of 4.5%.

According to a Reuters survey of economists, the country’s economy grew merely 0.3% in the fourth quarter. This means that overall growth rate for 2013 was 2.2%, primarily due to a promising start to the year. However, growth is expected to decline to 1.8% in 2014.

The Official Response

Last week, the country’s central bank’s governor Alexandre Tombini said steps to curb inflation were proving to be effective. The central bank has increased the benchmark Selic lending rate by 50 basis points seven times in a row beginning last April. Tombini claimed that the total increase of 3.25 percentage points has reduced inflation to a significant extent.

Tombini said he believed the economy would grow by 2.3% in 2014. He added that investments in infrastructure being created for the football World Cup and the jump in domestic consumption during the event would aid the economy.

Meanwhile, finance minister Guido Mantega revealed that the new primary surplus goal target for the country would be 1.9%. The government will reduce the planned budget for the year by $18.5 billion to achieve this target. The real gained 0.6% against the dollar after this statement.

These measures together indicate the seriousness of the administration to improve the economic situation on an urgent basis. Below we present three Brazilian companies which continue to exhibit significant strength, each of which also has a good Zacks Rank.

Companhia de Saneamento Basico do Estado de Sao Paulo

Companhia de Saneamento Basico do Estado de Sao Paulo (SBS - Free Report) , also known as SABESP, offers basic and environmental sanitation services within Brazil. The company’s primary operations include transportation, treatment and disposal of sewage as well as supply and treatment of water.

SABESP holds a Zacks Rank #1 (Strong Buy) and expects earnings growth of 5.90%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 7.47.

Embraer SA

Embraer SA (ERJ - Free Report) is a well-known aircraft manufacturer. The company operates across three major business divisions. These include: Defense and Security, Executive Aviation and Commercial Aviation. Apart from Brazil, the company has representative offices and subsidiaries in the U.S, China, France and several other countries  

Currently the company holds a Zacks Rank #2 (Buy) and expects earnings growth of 27.9%. It has a P/E (F1) of 14.61.

CPFL Energia S.A.                                                 

Our third choice is CPFL Energia S.A. . This is a holding company which is involved in distribution, generation and other aspects of the power sector. The company produces power from small and large hydroelectric facilities and thermoelectric stations. As of 2011, it had eight subsidiaries involved in distribution.

Apart from a Zacks Rank #2, CPFL Energia expects earnings growth of 38.3%. It has a P/E (F1) of 12.81.

Despite lagging behind China and India’s growth at the moment, Brazil has the ability to quickly resurface as the investment destination of choice. Affirmative action on part of the government lends further credence to this view. This is why these stocks would make prudent additions to your portfolio.

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