Brazil Consumer Stocks Signal More Easing and Growth Ahead (BRAQ, EWZ, EPI, FXI, BRFS, JBSAY)
Michael A. Gayed: Early in January, Brazil’s central bank cut its interest rates for the fourth time to 10.5%, with more room to keep cutting in an effort to soften the blow of a European economic slowdown. Investors in Brazil seem to be positioning aggressively for the idea that growth will pick up as a result.
With the Bank of England expanding its quantitative easing last week, last night’s decision by the Bank of Japan to actively foster inflation and the potential for the U.S. Fed to initiate another round of quantitative easing (QE3), it seems like we suddenly find ourselves in a situation whereby Super Ben and the League of Extraordinary Bankers are engaging in a global “shock and awe” response to deflation/recessionary pressures by flooding the financial system with more liquidity and cheaper money.
It is worth noting that it is not just central banks in developed economies embarking on such policies, with rumors of China (NYSEArca:FXI), Indonesia and India (NYSEArca:EPI) potentially easing themselves in the coming months.
And in Brazil, take a look below at the price ratio of the Global X Brazil Consumer ETF (NYSEArca:BRAQ) relative to the iShares Brazil ETF (NYSEArca:EWZ). As a reminder, a rising price ratio means the numerator/BRAQ is outperforming — up more/down less — the denominator/EWZ.
Notice that the spike in outperformance occurred leading right up to Brazil’s interest rate cut as investors piled into JBS (PINK:JBSAY), BRF Brasil Foods (NYSE:BRFS), and Natura Cosmeticos — sadly not traded here– which are heavily weighted stocks in the BRAQ ETF.
Outperformance seems to suggest that there is growing anticipation that Brazil’s consumer-oriented companies could directly benefit from global easy monetary policy, with traders buying more now because of a feeling of a pickup in growth and inflation expectations.
Although the relative ratio is volatile, a definitive trend higher may be at hand on the belief that brisk growth will return.
this means from a practical standpoint is that if you believe Brazil is likely to continue to outperform developed markets in 2012, a more concentrated position into a direct play on Brazil’s consumers may in its own way be a bet on further monetary easing — which seems to be a high probability scenario.
After all, if developed economies are doing it, emerging economies have plenty of political cover to follow in their footsteps.
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