The fundamentals are improving in Brazil–but right now it’s global cash flows that are driving emerging market stocks.
In the long run I want Brazil in my portfolio because of those improving fundamentals . In the short run I want to own Brazilian stocks because global cash is flowing their way. In the intermediate term, though, say nine months from now I want to get increasingly cautious as the U.S. Federal Reserve moves toward raising U.S. interest rates.
Right now all that adds up to a new higher target price for Market Vectors Brazil Small Cap ETF (BRF).
First, the fundamentals. On October 14 Goldman Sachs economist Jim O’Neill said that with the right mix of policies Brazil could sustain average annual economic growth of 5% over the next ten years. That’s a step up from Goldman’s prior projections of 4% to 4.5% growth and a huge jump from the days when Brazil struggled to get annual growth of 3% and badly lagged India and China.
O’Neill gives full credit for the improvement in growth to current Brazilian President Luiz Inacio Lula da Silva, Known in Brazil as Lula, the president has built a foundation of low inflation and sound fiscal policy that has released a tide of investment in Brazil. Lula cannot run for a third four-year term so it will be up to the winner in next year’s election to continue those policies.
Second, global cash flows. In my end of the day post on October 14 https://jubakpicks.com/2009/10/14/know-what-to-worry-about-and-when-if-you-dont-want-to-get-spooked-out-of-a-rally-or-get-killed-in-a-correction/ I explained how the U.S. dollar carry trade is pushing up global asset prices. (In short traders can borrow dollars really cheaply right now, invest them in assets such as commodities or emerging stock markets, and then repay them in cheaper dollars thanks to the continued decline of the dollar.)
I also listed the eventual unwinding of this trade as one of my worries for, say, mid to late 2010. The dollar will at least threaten to rally when the Federal Reserve starts to raise interest rates. And that will pull money out of currently favored assets as traders move to pay back their loans.
But mid-2010 is a long way off and it’s not even clear if the economy will be strong enough by then so that Federal Reserve will actually be able to raise interest rates.
So in the near-term, I think I’m going to hold onto my position in the Market Vectors Brazil Small Cap ETF and up my target price.
(You’ll remember from my initial buy that I picked this ETF over the much larger iShares MSCI Brazil Index ETF (EWZ) because the Market Vectors ETF is weighted toward small and medium size companies in Brazil’s domestic consumer sector while the iShares ETF is weighted toward Brazil’s commodities and export giants.)
As of October 15 I’m raising my target price on the Market Vectors Brazil ETF to $51 by June 2010 from the prior target of $44 by that date.
(Full disclosure: I own shares of iShares MSCI Brazil Index ETF and Market Vectors Brazil Small-Cap ETF in my personal portfolio.)
Jim, how is this new foreign investor tax going to affect your view of BRF or any other Brazil investment?
BZQ, double short Brazil, is the way to play this soon to burst bubble. long
Glad I got EWZ when it was below 50!
Goldman Sachs seems to think the dollar will stop unwinding sooner than later
http://www.reuters.com/article/marketsNews/idUSN1530341020091015
As of October 15 I’m raising my target price on the Market Vectors Brazil ETF to $51 by June 2010 from the prior target of $44 by that date.
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I wouldn’t be at all surprised if it reaches your target much sooner than this. I also wouldn’t be surprised if it takes a big swoon if the US markets dive . . .
Jim, why would you not let BRF run with a trailing stop of 6 – 8%?
Another great one Jim! I bought EWZ yesterday at $74.61. Just a month or so ago (before the announcement of Rio as the next Olympics venue) it was around $61. I should have jumped on it when I had the chance, but caution and the “too fast too soon” scenario won over my confidence. Snooze/lose can still hold true, even today! Your insights and guidance are always very much appreciated – and most important of all – trusted.
Thanks again,
Kathy
A timing question: Do you think the carry trade will reverse when the Fed begins raising interest rates or when they start talking seriously about the need to raise them in the short term.?
I am interested in Brazilian bonds Do you know of any way to do this? I tried looking into this a couple of years ago, but could find nothing.
Might be a little late; the scene you spell out would probably knock their bonds pretty hard.
this was a great pick, Jim. I think the Brazilian Real will appreciate against USD so even if the component stocks do not appreciate, this ETF will go up in the short term.
thanks!