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An apartment building in front of the Rocinha favela in Rio de Janeiro. (BRUNO DOMINGOS/REUTERS)
An apartment building in front of the Rocinha favela in Rio de Janeiro. (BRUNO DOMINGOS/REUTERS)

Emerging Markets

Cash in on Olympics 2016 with these Brazilian stocks Add to ...

As the Olympic limelight fades from London and begins to shine toward Rio de Janeiro, sports fans aren’t the only ones wondering if Brazil can emulate Britain’s success at the Summer Games.

Investors are already mulling how South America’s emerging economic giant can benefit from its role as host of the world’s two biggest events – soccer’s World Cup (2014) and the Summer Olympics (2016).

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In preparing to take the global sporting stage, Brazil has a chance to accelerate the modernization of its transportation and telecommunications infrastructure – presenting some intriguing investment opportunities.

“The sport events … are helping make investment in infrastructure a key item within the government’s agenda,” said Standard & Poor’s credit analyst Sebastien Briozzo, in a recent report on the impact of the World Cup and Olympics on Brazil’s economic prospects.

Because many of the major sports facilities required for the events are already in place, “the existing sports infrastructure allowed authorities to devote a very significant part of the original investment plans to development of additional infrastructure, which will likely keep benefiting the country long after the Games,” he wrote.

That’s good news for investors who follow the country, and have long been concerned about its chronic lack of public investment. Brazil’s rate of investment (both by the government and private investors) as a percentage of gross domestic product is well below that of other Latin American countries as well as other emerging economies such as India and Russia.

“Low investment remains the key constraint on Brazil’s medium-term growth,” Mr. Briozzo said.

In a separate report, S&P identified telecommunications companies as potential big winners, as telecom providers upgrade their networks, with the help of government funds, to accommodate the massive communications needs of the World Cup and Olympics.

But as with Olympic athletes, “it will take hard work, dedication, and – most of all – money,” wrote analysts Luisa Vilhena and Milena Zaniboni.

They said Brazil already has a huge wireless market – the number of mobile lines topped 250 million this year, in a country with a population of less than 200 million. But with the adoption of smartphones growing rapidly, “the companies will still need to invest in technology and broadband capacity for existing lines.”

Fortunately, they said, the country’s big telecoms – Telefonica Brasil S.A., Oi S.A., Globo Comunicacao e Participacoes S.A. and Net Servicos de Comunicacao – have low debt and “generate a lot of cash.”

They added that Brazil’s major media companies – especially Globo S.A., which won transmission rights to both the World Cup and the 2016 Games, and RDS Comunicacoes S.A. – stand to benefit from an expected surge in revenue stemming from both sports events. They predicted “double-digit” revenue growth for both companies in 2014 and 2016.

Nick Chamie, head of emerging markets research at RBC Dominion Securities Inc., said the sports-related infrastructure spending should support continued strong interest in foreign direct investment in Brazil. (Just last week, Canada’s Brookfield Asset Management Inc. announced a $1.7-billion investment in Brazilian toll highways.)

However, he doubts that the World Cup and Olympic spending plans will substantially address the broader issues that weigh on Brazil’s stocks and bonds – eroding economic growth (expected below 2 per cent in 2012), slipping competitiveness and anemic productivity gains.

“It would require something on a much larger scale than [the spending] being planned for the Games,” he said. “You’re talking about a different type of infrastructure, too. [What’s needed is] business infrastructure – ports, rail, that sort of thing.”

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London’s stock market did substantially outperform global markets in the lead-up to the 2012 Games, but there’s little evidence that hosting an Olympics has a discernible impact on a country’s equity market as the Games approach. Here's a look at how the benchmark stock indexes in the host countries of recent Summer Olympics fared in the months leading up to and including their Games, compared with the MSCI World stock index:

 

COUNTRY12 MONTHS3 MONTHS
Britain (2012)16.5%5.2%
MSCI World6.1%2.9%
   
China (2008)-52.9%-30.8%
MSCI World-13.8%-11.9%
   
Greece (2004)5.0%-4.2%
MSCI World14.1%-0.9%
   
Australia (2000)15.8%-0.4%
MSCI World7.0%-5.3%

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