Brazil, The New Frontier

When most people think of Brazil, they think of soccer, Carnival, and beautiful ladies walking down the beaches of Rio de Janeiro. What many people don't know is that Brazil is poised to overtake France and England as the world's fifth largest economy. The Brazilian economy's solid performance during the 2008 financial crisis and its strong and early recovery, including 2010 growth of 7.5% have contributed to this transition from a regional to a global power.

Growing up in Brazil during the 80s, I was exposed to my first money lesson at a very young age. Inflation was out of control. The same carton of milk would cost more in the afternoon than it did in the morning. The currency changed names at least 4 times. And my mom used to buy cars (hard assets) instead of keeping her money at the bank, where it would lose value each day. It wasn't until 1994 that Brazil was able to control inflation and create much needed currency stability. The mastermind behind the so-called "Plano Real" was Fernando Henrique Cardoso, the Minister of Finance at the time. Much credit is given to President Luis Inacio "Lula" da Silva for fixing Brazil's economy, but it was Fernando Henrique, who served as President from 1995 to 2002, who laid all the groundwork so Brazil's economy could flourish.

Brazil's abundance of natural resources, vast expanses of arable farmland, and 14 percent of the world's fresh water supply contributes to agriculture being a major sector of the Brazilian economy. Brazil is the world's largest producer of sugarcane, coffee, oranges and other tropical fruits, and has the world's largest commercial cattle herd. Brazil is also the largest producer of iron ore and the leading exporter of beef, chicken, orange juice, sugar, coffee, and tobacco.

The recent discovery of oil 150 miles off the coast of Brazil is the largest anywhere in the world in the past 35 years. Petrobras, which in 2010 raised $70 billion in the word's largest offering of shares, is preparing to drill 20,000 feet below the surface of the Atlantic to reach oil fields that sit underneath layers of salt beds. According to experts, Brazil should be producing in excess of six million barrels a day, which will rank the country as the third largest producer and exporter of oil in the world.

Brazil is also one of the leading producers of hydroelectric power. Eighty percent of its electricity comes from hydropower. It has one of the most sophisticated biofuels industries in the world, and for its size, the world's greenest economy. Sugar cane based ethanol makes up over 50 percent of its vehicle fuel usage. Brazil and the U.S., as the world's largest biofuels producers, have been working together since 2007 to help make sustainable biofuels a global commodity.

But it is not just commodities that are driving the Brazilian boom. The country has a substantial manufacturing base and a large auto industry. Aviation giant Embraer is the world's third largest aircraft manufacturer, behind Boeing and Airbus and a main supplier of regional jets to the U.S. market. Because of cheap labor, tax incentives, and high import tariffs on foreign automobiles, many foreign car manufacturers have shifted production to Brazil, including Mercedes Benz, Hyundai, Kia, and Audi. Brazil also ranks in the top 5 for mobile phones, personal computers and related services. Currently there are more cell phones in Brazil than people.

Much of the credit has to be given to former President Lula. During his 8-year tenure as
President (2003-2010), Brazil experienced one of the biggest economic booms ever seen. During Lula's administration, surging exports, economic growth, and social programs helped lift tens of millions of Brazilians out of poverty. For the first time in the country's history, a majority of Brazilians are now middle-class, and domestic consumption has become an important driver of Brazilian growth.

On my recent trip to Brazil I witnessed these changes firsthand. My family owns a commercial building in Sao Paulo, which now has a waiting list for the first time. My younger sister has been able to finance the purchase of a car at a reasonable fixed interest rate, which would seem impossible a few years ago. Many of my friends have taken advantage of a mortgage market that was inexistent a few years back. They were also able to secure fixed-rate mortgages at reasonable rates when in the past the
only option would be a variable loan at double-digit rates. The transformation in Brazil is undeniable and the future looks even more promising as Brazil gets prepared to host two of the biggest international athletic competitions in the world: the FIFA Soccer World Cup in 2014 and the Summer Olympic games in 2016.

Danilo Kawasaki
Gerber Kawasaki Wealth Management
2716 Ocean Park Blvd #2020
Santa Monica CA 90405


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This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. Investing involves risk including potential loss of principal.