With Brazil’s central bank likely to start raising interest rates at its April 27 meeting, I’m going to cut my short-term exposure to my favorite developing market–for the long term–by selling Market Vectors Brazil Small-Cap ETF BRF). I’m got an 8.3% gain in the ETF (Exchange Traded Fund) since I added it to Jubak’s Picks on February 1 2010.
The betting among economists is that the central bank will raise its target Selic rate from the current 8.75% to 11.25% by the end of 2010 in order to reduce inflation that’s now running at 5.2%. (For more on Brazil and inflation see my post http://jubakpicks.com/2010/04/14/brazil-joins-china-on-the-road-to-higher-inflation-and-higher-interest-rates/ )
Why sell this position instead of a Brazilian big-cap stock like Ambev (ABV), which is also in the portfolio?
Small companies are especially vulnerable to increases in interest rates since banks are a more important source of capital than they are for larger companies that have an easier time tapping the stock and bond markets. And any slowdown in Brazil’s domestic economy will have a bigger effect on exactly the small domestic companies targeted by this ETF than on larger Brazilian companies that export to world markets.
This is the second time I’ve profitably traded in and out of this ETF. I anticipate that I’ll revisit this position later in 2010 when interest rate increases have taken some of the steam out of Brazilian stocks.
Full disclosure: I own shares of Market Vectors Brazil Small-Cap ETF in my personal portfolio. I will sell that position three days after this post went live.