Brazil investments show upside

Brazil funds are becoming lucrative investments as the South American nation’s currency has recently seen its value surge against the Korean won.

At the beginning of the year, 1 Brazilian real (31 cents) was traded at 295.9 won (27 cents) but as of Sept. 7 it was trading at 345.55 won. That’s a nearly 17 percent increase from the beginning of the year and allows investors a lot of potential.

There is also a strong possibility of the Brazilian central bank lowering its key interest rate, which would benefit those holding Brazilian bonds. A lowering of the key interest rate will raise the value of the bonds.

“As inflation expectations have been lowered, Brazil is entering a cycle of lowering its key interest rate,” said Kim Ji-hoon, a Samsung Securities analyst.

Brazil’s inflation, which was 10.7 percent in January, eased to 8.7 percent in July, which has triggered forecasts that the Brazilian central bank will lower the key interest rate at least once this year.

Political uncertainty eased after Vice President Michel Temer became President following the impeachment of the country’s first female President, Dilma Rousseff. Unlike his predecessor, who concentrated on the equal distribution of wealth, Temer is known to be market friendly. A current account deficit that has weighed on Brazil’s economy has also been shrinking, indicating that the country may have weathered the worst.

“Although we can’t expect a sudden recovery, the possibility of Brazil returning to the huge volatility it suffered in the last three years has shrunk,” said Park Seung-jin, an analyst at Korea Investment and Securities.

With major economies continuing to keep their key interest rates near zero, Brazil’s 10-year treasuries with an annual interest rate of 12 percent are attracting investors.

“In the next two to three years, interest rates are expected to continue to be lowered, which makes it a favorable condition for bond investment,” said Shin Hwan-jong, an NH Investment and Securities analyst.

Experts advise purchases every time the currency depreciates.

But there is some skepticism about investing in Brazil due to the massive losses that investors suffered in the past. In the mid-2000s, Brazilian funds were immensely popular with reports that the emerging BRIC economies - Brazil, Russia, India and China - would become the center of the global economy. Several funds posted annual profit rates of over 50 percent. But as rapidly as Brazilian investments ascended, they tumbled, particularly with the global meltdown of 2008.

Funds investing in treasuries have been a massive headache for investors with the political unrest and sluggish economy resulting in interest rates and currency exchange fluctuating immensely. Even when the key interest rate has been continuously lowered since 2011, investors struggled because of the Brazilian currency. The real, which was trading at 700 won in 2011, appreciated to below 300 won by the second half of 2015, expanding the losses on Brazilian investments.

Expert caution against aggressive investments, especially over the exchange rate.

“Brazil, Russia and South Africa, whose economies are vulnerable to external conditions, are likely to be hit hard [when the U.S. central bank raises its interest rate,],” said Lee Jong-woo, head of IBK Investment and Securities research center. “Considering the speed of economic recovery, the risk of the Brazilian currency exchange rate shouldn’t be ignored.”

The Brazilian government, which is hoping to turn around its negative economic growth, doesn’t want its currency to depreciate.

“The Brazilian government is showing the will to maintain the real at a certain level,” said Park of Korea Investment and Securities.

BY JANG WON-SEOK, LEE HO-JEONG [lee.hojeong@joongang.co.kr]