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Brazil’s economy sambas but its stock market sinks–bargains anyone?

posted on December 17, 2009 at 2:46 pm
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Blame it on Greece. That country’s runaway budget deficit and the resulting downgrades to its sovereign debt from Standard & Poor’s and Fitch Ratings have spooked investors around the world into moving into U.S. dollars for safety and out of commodities and emerging economy stock markets.

Brazil has been one of the most conspicuous victims. The Bovespa, Brazil’s major stock market, is down 2.4% today, the day of the most recent downgrade on Greece. Some Brazilian stocks are down even harder. Add in the effect of a rising dollar today and the drops for the ADRs traded in New York were 4% to 6% on the day as of 2 p.m. Eastern for stocks such as BRF Brasil Foods (BRFS), Itau Unibanco (ITUB), and Vale (VALE). Brazilian airline Tam (TAM) was down 7.5% on the day.

Just goes to show you how at this stage of the global stock market rally international cash flows completely overshadow national fundamental news.

Because the fundamental news yesterday out of Brazil was bottoms-up-on-that-caipirinha good.

In November, the government announced on December 16, Brazil’s economy created 246,695 net registered jobs. (That means Brazil’s huge off-the-tax-books job market created even more.) That gain was an all time record for a month and is up from a none-too-shabby 230,956 jobs created in October.

The country is on a path to creating 1.3 million registered jobs in 2009 and projections call for an addition of 2 million net registered jobs in 2010.

That’s great news for Brazil’s domestic consumer industries since more jobs means more consumer spending. That connection was confirmed by the release of numbers for October retail sales that showed an 8.4% increase year over year.

No news about economic growth is all good news these days as central banks look to see when they can (in the case of the United States) or should (in the case of Brazil) raise interest rates. Lower than expected GDP growth in the third quarter had raised hopes that Brazil’s central bank would leave its benchmark interest rate at 8.75%. That’s a record low benchmark rate for Brazil.

The higher than expected jobs number, however, has apparently convinced the financial markets that interest rate increases to slow the economy and head off inflation are now back on the table. That’s helped increase the damage to stock prices from fallout from the Greek crisis.

The economy is now projected to grow by 5% in 2010, according to a survey of economists by the central bank. And economists are now expecting an increase in interest rates to 10.6% by the end of 2010.

An increase like that will keep pushing the Brazilian real higher against the dollar and the currencies of other big trading partners such as China. And that will be a problem for Brazil’s exporters that are already suffering from the pain of seeing their goods become more expensive to overseas costumers as the real appreciates.

All this does suggest that anyone interested in buying into Brazil’s long-term growth story—and I am—should start their bargain hunting with Brazilian stocks with a domestic focus. Rising employment and stronger than expected economic growth should drive sales and profits for domestic companies higher fast enough to outweigh the projected increase in interest rates.

I’d add BRF Brasil Foods (BRFS), South America’s biggest poultry producer, Itau Unibanco (ITUB), a bank where faster economic growth should put an end of the need to reserve more against bad debts, and, of course, the domestic ETF Market Vectors Brazil Small Cap (BRF) that I sold out of Jubak’s Picks on December 9. That ETF is down just a little more than 3% since I sold it so it’s too soon to re-buy but I’d keep an eye on it.

I would also add Vale (VALE), the Brazilian iron ore and nickel producer, to that list even though it is an export driven company. Vale’s costs are so low and the iron ore market so concentrated that this stock makes my Brazilian watch list anyway. (For more on bargains in emerging markets see my December 16 post  http://jubakpicks.com/2009/12/16/a-rising-dollar-stalls-all-boats-so-far/ )

Full disclosure: I own shares of Itau Unibaco in my personal account.

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  • marsdon1201 on 17 December 2009

    Would CPL make your Brazilian watch list as part of the long-term growth story. A major utility with a good dividend.

  • grindy2424 on 17 December 2009


    What levels are you looking to add ITUB, BRSF, and VALE at here? I don’t know about BRSF, but I own shares of ITUB (bought at $16.65) and looking to add in the $20.50 range. I sold Vale earlier in the rally but I think @ 26.50 with an upside target around $32 looks really appealing. Everyone else’s thoughts?

  • viwi on 17 December 2009

    I am somewhat confused. Those stocks you mentioned barely sank by 5% today, and you already call them bargains? They all have very high P/E as well.
    Would it be possible for you in the future to make some quantitative recommendations, such as “buy” if price goes below XXX, “sell” if the price goes above YYY? You make target prices for those stocks anyway, so you already define YYY price.

  • Seaturtlelady on 17 December 2009

    Hi Jim,

    After reading your article on Brazilian stock PBR a while back, I bought at $22.26 a share and was wondering what your thoughts are since over the past couple of weeks this particular stock has dropped quite a bit.

    On another note, I have thoroughly enjoyed reading and learning from you over the past year. Thank you so much for sharing your wealth of knowledge with us.

  • lotteollie on 18 December 2009

    Jim: Like Seaturtlelady, I am also curious about PBR. Long term, I want to hold it and am looking for a good entry point. Brazil selling off a bit just makes me more anxious to want to add to my existing Brazil positions.Thanks.

  • amtrend10 on 18 December 2009

    viwi…Jim is saying I think that Brazil is a hot sector and that an unusal anomily is giving cause for that hot market to drop some. Many of us have been caught by the short hair in that we have bought Brazil and taken our profits but are having trouble getting back in. JJ says to watch this drop and take your chances wherever. Keep in mind that most inflationary markets will rise insanely only to bomb at some point. Last time VALE reached hi 30′s ?? it split 2 for 1 . Have had good luck with Brazil (10% portfolio) but watch daily.

  • bsorge on 18 December 2009

    I don’t see any changes in the Brazil economy and the Europe problems should have very little effect. Any material drop is definitely a buying opportunity. You have to go an visit Brazil to appreciate what they are doing. Again some entry points would be helpful.

  • nukeage on 4 January 2010

    I’ve read this post three times this weekend . . . (and heard you say in MSN Money video to go overseas if you don’t think the U.S. is going to make it in 2010 or something like it) please please PLEASE do tell us when to get back in!!!

  • jlabovitz on 23 August 2010

    No comments for a LONG time but this is 70%+ down. When does this become attractive, Jim? What are the reasons for the nose dive of such an interesting stock. Is there an entry point on the horizon?

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