Belgian brewing giant Interbrew has its sights on Brazil's AmBev. Wal-Mart (NYSE:WMT) shares tapped a fresh peak Monday after the world's largest retailer got bigger, buying a Brazilian supermarket. Besides Rio's Carnival and the Amazon, what's so exciting about Brazil? Quite simply, it's huge consumer growth. But investors shouldn't ignore the risks.
Brazil is a huge opportunity. Just look at the statistics. Brazil has consumer market of 75 million with spending power of nearly $300 billion. That's a lot of money to spend on things like drinks and clothing. Then consider the growth up for grabs. There are 175 million Brazilians -- half of them under the age of 20 -- so there will be lots of new beer buyers and shoppers entering the market. It's these kinds of figures that should excite investors in Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), Procter & Gamble (NYSE:PG), Nokia (NYSE:NOK), Johnson & Johnson (NYSE:JNJ), Unilever, General Motors (NYSE:GM), and now Walmart and Interbrew.
But exposure to Brazil is not for the faint of heart. There are big risks in investing in this economically volatile market and a lot of ways that investors can get taken by surprise. For starters the real, Brazil's currency, is always a worry. Confidence in the real is prone to sharp swings that can translate into share price volatility for heavily exposed firms. The value of the real is important because companies typically make raw material purchases with U.S. dollars. Will the real stay stable? It's hard to be sure.
Interest rates can also be shocking. Only a couple of years ago, interest rates were as high as 45%. Set by the central bank, the benchmark lending rate is now less than 10%, down from 19% last year. Recent moves by Brazil's central bank are freeing up credit for consumers and stoking investment, but for how long? Then there is the issue of corruption and government meddling. Brazil's legal and regulatory systems are not known as paragons of integrity and transparency.
Yes, the consumer market in Brazil is massive, but there are plenty of things that can stop the party. Investors, and American businesses, should keep these facts in mind before jumping in.
Interested in discovering undervalued treasures? Take a free, 30-day trial to Tom Gardner's Motley Fool Hidden Gems .
Motley Fool contributor Ben McClure hails from the Great White North. Ben doesn't own any shares mentioned here.
