Progressive consumption: how middle class growth is boosting Brazil’s investment case

As Boris Johnson pressed the Olympic flag into the hand of Rio de Janeiro’s mayor Eduardo Paes, he must have felt relieved it was our athletes competing and not the British economy. The UK has been sluggish for years and any hope of an increase in growth was dashed when a double-dip recession was announced early this year; however, in stark contrast, the Brazilian economy would be nearing a podium finish.

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As Boris Johnson pressed the Olympic flag into the hand of Rio de Janeiro’s mayor Eduardo Paes, he must have felt relieved it was our athletes competing and not the British economy. The UK has been sluggish for years and any hope of an increase in growth was dashed when a double-dip recession was announced early this year; however, in stark contrast, the Brazilian economy would be nearing a podium finish.

Brazil is a closed economy and although China will have some impact it will not be overtly significant. There is mismatch in the expectations of Brazil. As a country it has a reputation for being highly commodity-centric, but if you look at the main constituents of the Bovespa (Brazil’s local stock exchange) more than 40% of companies have a direct relation to commodities. When commodity prices soften this has an impact on the stock exchange, however there is less linkage between commodities and the health of the overall economy in Brazil.

According to Allianz Global Investors Brazil fund manager Carlos de Leon, overall exports in Brazil represent only 12% of GDP. “Brazil is a closed economy and within exports 17% go to China followed by 11% to the US,” he adds.
Ashmore’s Booth concurs with this view and says it has become fashionable among the investment industry to talk about the health of China and link it to everything.

He says: “There are bigger things Brazil must worry about to sustain its rate of growth, such as investment in education and infrastructure.

“China is retrenching and moving from an export model of growth to a consumer/domestic model – this involves a temporary slowing but eventually the Chinese will be building real estate and infrastructure and this will increase demand for commodities.”

Running another race

Just as China has been retrenching its economy, Brazil’s real story is the growth of its emerging middle class. Brazilian economists split the demographics of the country into a number of classes – class A representing the richest and class E the poorest.

In recent years, with improvements in the minimum wage and an increase in employment many people have been raised into the middle class. It is now estimated by the Brazilian government class C has around 90 million members and this represents 52% of the population. This emerging middle class has become one of the main reasons many foreign companies are looking to open up shop in Brazil.

de Leon backs this up and adds: “The main reason to invest in Brazil is because of the power of the Brazilian consumer story and the emerging class C. This consumer represents about 60% of GDP.”

Hermes Emerging Markets portfolio manager Samir Patel says this domestic story has meant his firm has been able to identify some interesting ideas. “This growing middle class presents us with the scope to look outside the box of companies such as Ambev, which we feel are overvalued, and look at other domestic stories poised to take advantage of this growth.”

Another effect of this rise of the middle class is the increase in consumer credit – it has been nothing short of an explosion (see chart above). The increase of formal jobs and increasing wages means people now can get bank accounts and this also means they have access to credit.

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