Brazil wheels out unconventional weapon to control currency, stock market bubbles in the making
Brazil slapped a 2% tax on overseas investments in Brazilian stocks on October 20.
The tax is a serious but most probably ineffective attempt to slow the rise of the real, the Brazilian currency, and to curb cash inflows that are pushing up both Brazilian stock prices and inflation.
Brazilian stocks are up 70% in 2009.
The Brazilian central bank highlighted the seriousness of the problem by releasing a survey predicting an increase in Brazilian short-term interest rates to 10.5% in 2010 from the current 8.75%. Inflation, the bank projected, would climb modestly from a high 4.3% in 2009 to 4.41% in 2010. That’s still down from an inflation rate of 5.9% in 2008.
Unfortunately, even with the tax on investments, the bank is projecting that the real will continue to appreciate against the U.S. dollar. That would push the country’s trade surplus down to $16.5 billion in 2010 from $25.85 in 2009 as a rising currency made Brazilian goods more expensive on world markets. The real is up 33% against the U.S. dollar this year.
Brazilian stocks fell on news of the tax, but I don’t expect the effect to last for long.
Investors can easily work around the tax by buying the ADRs (American Depository Receipts) of Brazilian stocks in New York rather than buying the shares themselves in Brazil.
And the continued out performance of the Brazilian economy, which moved out of recession in the current quarter, and relatively high interest rates guarantees the continued flow of overseas cash into Brazilian financial assets.
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BRF and EWZ are poised to erase all the loss suffered tomorrow already.
yesterday*
Will these taxes affect EWZ and BRF?
It has about as much effect has the Korean government’s attempt to devalue the Won vs the USD
Jim,
I’m really new to this stuff. I do however invest online using the picks you and other oracles suggest. What is an ADR (other than its acronym), and are they something you can typically purchase from an online broker?
Lyterm,
Jim did give what ADR is (American Depository Receipts), and for you I googled that and came up with the wikipedia for it which explains it better then I could:
http://en.wikipedia.org/wiki/American_Depositary_Receipt
I had a trailing stop loss setup on this stock.
It happened to trigger at the days absolute low (42.90 something ) the day the tax was announced. Grrrrr! The question always is – To buy or sit this one out
http://etfxray.typepad.com/etfxray/2009/10/the-politics-behind-brazils-investment-tax-.html
Jim;
I heard separately that the tax is being reconsidered to be only on withdrawals and only if money is claimed within 2 months of initial investment. I have not confirmed this.