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 https://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.
Sold few weeks ago. I decided the second timer is not a charmer.
Thanks, Jim – very timely!
Sold my BRF and ADRE today – charts (MACD) turning down for both.
Jim,
The one problem with this strategy of selling foreign etf’s when they raise rates is their higher rates relative to ours will tend to strengthen their currency. You may have to try and buy it back with cheaper dollars in the future.
Frank
Virtus,
I would say both. We are locking in the profits we already have, and waiting for the inevitable drop in price that is coming so we can buy back in at a lower price.
To all of you who asked about EWZ, I personally would sell it now, although I suspect EWZ won’t take nearly as big a hit as BRF or BRXX will. But it will take a hit.
What do rising rates mean for brazil govt debt, like that held in PCY?
From a long-term investment position are we waiting for a drop in price for a new entry point?
Or is selling off BRF now just a hedge against the possibility of a significant downward movement?
Im also wondering what to do with EWZ
Hi Jim,
Thanks for all the good advice.
I own Brazilian ETF EWZ. Should I sell this now as you advised with BRF
Jim,
Unrelated but Apache has made a couple of moves this week. Is there going to be an analysis on this stock in the near future? Thanks and keep up the hard work.
Any thoughts on EWZ? Primarily large cap in nature but not immune to the rate increases.
Jim,
I’m going to follow your lead and sell BRXX for the same reasons. I sold off my BRF a while back to cut my exposure to Brazil because of the coming rate increases. But you are correct about taking the profits now, and come back later after the dust settles.
Jim moves the market! At 1:30 PM, the time of posting of this blog, BRF was at 47.47 and going up. At 1:46 PM it started to fall. Now, at 2:45 PM, it is at 46.90 and headed down. Wow!
sold
This entire sequence on BRF has been a nice piece of trading/analysis.
Hi Jim,
Thanks for keeping an eye on the Brazilian and Chinese economies with respect to inflation. I sold my positions in BRF (with a profit 🙂 ) since your arguments with regards to small businesses having a harder time when interest rates go up makes a lot of sense. As for GDX, do you think it will go up due to the inflation in these 2 countries or is that reading too much into it.