Like many EM countries, Brazil is perceived to be a pure commodity or natural resource play. It is true that Brazil is the world's largest exporter or producer of beef, coffee, ethanol, iron ore and sugar. Increasing the perception, 45% of Brazil's stock market index — the Bovespa — consists of oil, mining and steel stocks. In reality, however, those same sectors make up just 8% of Brazil's gross domestic product. The vast majority of Brazil's growth engine is domestic consumption — Brazil's services sector makes up nearly 70% of the country's GDP. Indeed, Brazil is not a homogenous market and economy, as is commonly thought.
Today, Brazil's domestic sectors are being fueled by significant and powerful forces: increased domestic consumption, high absolute and relative GDP growth, wage growth, low unemployment and continuing educational advances.
While we believe these factors provide long-term tail winds and local investment opportunities, more importantly, we think Brazil is ripe for sector and stock specific differentiation at a time when most developed equity markets battle high cross-sectional correlation.