Brazilian Stocks Showing Weakness On Inflation, Europe (EWZ, VGK)
Tony Daltorio: Growing fears of renewed inflation, and uncertainties over the European (NYSE:VGK) debt crisis, are pushing down Brazilian stocks, making them among the worst performers in emerging markets.
Brazil’s Bovespa index has fallen about 27% so far this year, with the iShares MSCI Brazil Index ETF (NYSE:EWZ) down a similar amount.
Brazilian stocks, as measured by current price-to-book ratio, are trading at a discount of more than 20% to their 2008-09 lows, and at 8.5 times to 9 times forward earnings, according to Credit Suisse.
Brazil’s central bank has reversed course and is now cutting interest rates. It recently cut rates by one-half percent to 12% and is expected to lower rates by three-quarter percent in its October 19 meeting.
The moves fly in the face of monetary policy orthodoxy, which dictates that policy makers reduce the money supply — mostly by raising interest rates — when inflation erodes the value of money. Brazil’s inflation is currently about 7.33%, far above the central bank target.
“The central bank has made a big bet that inflation will drop,” said Oliver Leyland of Mirae Asset Management in Sao Paulo.
If the bank is wrong, Brazilian inflation will be well above 7% next year, and Brazil’s stocks will continue to suffer, said Fabio Kanczuk, a partner with Sao-Paulo based Reliance Asset Management.
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