Investing ahead of Brazil's 2014 World Cup and 2016 Olympics

Yesterday I discussed the economic benefits for Brazil hosting both the 2014 World Cup in football and the 2016 Summer Olympics. Overall the short-term gains will likely be limited, but longer-term prospects are promising as the country improves its infrastructure significantly and shows signs of positive developments.

Furthermore I mentioned a few industries within Brazil that will be the biggest gainers from being the host country of the two sport events. The sectors highlighted were mainly tourism, retail, construction, telecommunication and transportation. Let's now look at a few individual companies.

Individual local stocks

There are several local stocks (all tradable on Saxo Bank’s platforms with Equity Research available) within the above mentioned industries that have the potential to reap benefits from Brazil's position as host nation.

With increased tourism comes increased demand for products/services from the consumer services and non-durables industries. Two stocks that I have highlighted in Table 1 are the beer producer AmBev and hyper-/supermarket operator CBD (Companhia Brasileira de Distibuicao Grupo Pao de Acucar). With tourism expected to more than double in the years from 2014 to 2016, local demand for the two companies’ products is likely to increase. Analysts expect the AmBev and CBD to have a three-year cumulative annual growth rate (CAGR) of earnings per share around 12.5 and 26.6 percent respectively.

The electric utility industry in Brazil is expected to grow strongly for the coming years due to increased electricity demand. The country’s plan is to increase its electricity production from a capacity of 70,000 megawatts to 90,000 through 2014. CEMIG and Tractebel, both Brazilian generators and distributors of electricity, are among the candidates benefitting from such developments.

Having solid telecommunications systems is one of the many things vital to carrying out successful events like the Olympics and World Cup. Late last year, the Brazilian government announced a plan for spending USD 7.2bn on improving its communication infrastructure. With increased tourism surrounding the games, majors within this industry are likely to benefit from increased demand.

Telefonica and Oi are the two major telecommunication providers highlighted in Table 1. With Telefonica Brasil being an illiquid stock, as it is majority owned by its Spanish partner Telefonica, you should look to the Spanish mother company for trading. Telefonica has a significant exposure to the Latin American region with Brazil as one of its core markets.

International stocks exposed to Brazil

If you are not comfortable investing directly in Brazilian stocks, there are a few international stocks that have significant exposure to the Brazil’s economy and have the potential to boost its growth as the economy develops. As only part of these stocks’ revenues comes from Brazil, they can be seen as a more diversified play than investing in local stocks. 

The stocks highlighted in Table 2 have a revenue exposure to Brazil ranging from 20 to 52 percent. Again, I am highlighting stocks that have the potential to gain from increased tourism and publicity within Brazil, such as telecommunications, consumer services and non-durables.  

The odd one standing out from Table 2 is Kinross Gold Corp, one of top 3 gold producers within Brazil. The reason I highlight Kinross here is that as Brazil aims to improve, roads, railways and shipping ports ahead of the Olympics, Kinross’ exports from Brazil could become more efficient. This holds true for any other businesses that actively exportz products from Brazil to other parts of the world.

Even though these stocks having the potential to benefit from improved infrastructure and the boost in tourism, there are of course other company-specific indicators that need to be evaluated before making the investment decision.

Investing in the Brazilian stock index is also an option

If individual stock picking doesn’t appeal to you, investing in the broad market by choosing the Bovespa index might be the way to go. As you can see in Chart 1, investing in the entire index will give you a broad sector exposure.

Previously we have seen examples that local indices of the Summer Olympic host do tend to outperform the broader market the year following the event. Even though we haven’t yet seen the argument hold for FTSE following the 2012 London Olympics, ASX, ATHEX and Hang Seng all outperformed the broad markets following the 2000, 2004 and 2008 Summer Olympics (Chart 2).

For an emerging market like Brazil, the future growth potential of the economy looks promising. Adding significant ’commercial exposure’ of the local market will provide further support as Brazil does its utmost to lure foreign investment to the country.

However, as my colleague Peter Bo Kiær has discussed previously, regional risk within Latin America needs to be considered before investing in the area.

Nevertheless, Brazil, as well as companies exposed to Brazil’s economy, can reap benefits from initiatives surrounding the 2014 FIFA World Cup and the 2016 Olympics. The increased tourism and further development of its Brazil’s ‘global profile’ will surely become an advantage in the future.

For further information about the individual stocks and sectors mentioned above, please check out Saxo Bank’s Stock Screener and Equity Research offering.