Japanese investors hope to tap the potential of Brazil
By Chikako Mogi ReutersPublished: September 11, 2008
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TOKYO: Individual investors in Japan have ramped up their bets on Brazil, which may be one emerging market to dodge the global slowdown comparatively unharmed thanks to its vast natural resources and political stability.
Faced with an annual return of just half a percent on short-term deposits at home, Japanese investors are continually looking for higher yields elsewhere. And the credit crisis has led them to be more selective about how to achieve those returns, since the turmoil created by the deteriorating U.S. housing market has underscored the risk of investing in developing countries.
But analysts say the potential of Brazil is outweighing those concerns - despite a drop for the Brazilian currency, the real - because its economy, the largest in Latin America, is much better cushioned against external shocks than other resource-rich nations, which should allow it to recover faster when the current phase of global weakness has passed.
"Brazil stands out at a time when investors are poring over fundamentals," said Takeshi Iio, a senior fund manager at Mitsubishi UFJ Asset Management.
The amount invested in Japanese toushin, or mutual funds, that focus on Brazil and Latin America nearly doubled to ¥879.4 billion, or $8.2 billion, as of the end of July from ¥484.3 billion at the end of last year, according to Reuters data. The amount invested in Brazil by toushin funds is even higher than the amount invested in China, and was surpassed only by the amount invested in India.
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Brazil was given an investment-grade sovereign credit rating in April, opening the door to foreign investors whose funds restrict them from putting money into risky assets.
"Brazil puts priority in containing an economic bubble, and its moderate growth rate reflects its will to ensure sustainable and stable growth," said Shuji Nishimura, an economist at the Japan Center for International Finance who specializes in Brazil.
Bradesco, the largest private-sector bank in Brazil, signed an agreement with Mitsubishi UFJ Financial Group in August to sell funds that invest in Brazilian assets to Japanese retail investors.
Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland, said the real could be the next currency of choice for issuers of uridashi bonds, foreign currency bonds that are sold directly to wealthy Japanese investors.
"Uridashi bonds in such high-yielding currencies as the South African rand have been growing, but interest is shifting recently to currencies with higher yields than South Africa," he said in a research note. South African interest rates stand at 12 percent.
The benchmark lending rate in Brazil, the Selic, stands at 13.75 percent, a level that is expected to help investors overcome any further currency losses if they hold onto their investments for two to three years, said Iio, of Mitsubishi UFJ Asset Management.
Brazil's efforts to curb inflation could prove to be a double-edged sword, since tight monetary policy, which usually increases the value of a country's currency, can also slow economic growth.
But analysts said that Brazil's vast natural resources, which have been bolstered by recent discoveries of large oil deposits, leave scope for self-sufficiency. They also noted that geopolitical risks in the country are low - the country has not been at war in more than a century - and the political horizon appears stable, with the current government set to remain in place until 2010.
"Supply in resources will likely remain tight due to the long-term outlook of growing global population, urbanization of developing countries and robust domestic demand - which makes investment in Brazil rational even if there is the risk of the currency depreciating over the next year or so," Iio said.
The real recently touched a nine-year high against the dollar as the Brazilian central bank, anxious to avoid the hyper-inflation that has beset the country in the past, maintains tight monetary policy, even after raising benchmark interest rates by a combined 2.5 percentage points since April.
Several analysts say the real has scope to fall from around 1.6780 to the dollar to around 1.8 or 1.9 by the end of this year.
Japanese companies are also increasing their investments in Brazil, and analysts say that the stock of foreign currency reserves and capital inflows give the Brazilian authorities leeway to manage any major swings for the real.
After a record inflow in 2007, foreign direct investment to Brazil is expected to remain at similar levels this year, reaching $34 billion this year, analysts said.
Japanese direct investment has been gradually picking up as companies look to secure supplies of energy, food and raw materials, averaging ¥139.4 billion from 2005 to 2007
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