How to Play the Brazilian Rebound (NYSEArca:EWZ, NYSEArca:BRF, NYSEArca:BRXX)

brazilEver since Jim O’Neill coined the phrase “BRIC nations,” it was thought that Brazil, Russia, India and China would play major parts in this new economic world order we see evolving today. But lately, many in the market have lost confidence in the four nations.

And among the BRICs, Brazil has become a black sheep over the past year.

Brazil was on fire leading up to 2012. However, last year proved to be a stumbling block to the country’s growth. Adding fuel to the fire, the International Monetary Fund (IMF) revised and reduced its growth forecast for Brazil twice in 2012 – for that year and this one.

The IMF now expects the country to grow at 4% in 2013. That rate of growth is significantly lower when you compare it with Brazil’s “BRIC brethren” China and India.

And making matters worse, Brazil’s currency depreciated more than 10% to the dollar in 2012.

So Why Now Paint a Rose-Colored Picture?

Back in October of 2012, Investment U published an article stating now was the time to get back into Brazil. Carl Delfield wrote about how the Brazilian government brought on the tough times of 2012. From 2004 to 2008, with the economy growing at about 8% per year, Brazil’s stock market was up 350%.

However, the country’s policymakers got a little too big for their britches and did more harm than good. Interest rates were raised to over 12%. The leaders also decided to meddle in the business of some of its largest and most successful corporations.

Carl’s analysis went on to show the government had finally come to the realization it was doing more harm than good. And with “the policy pendulum beginning to shift again,” it was time to pounce on the buying opportunity.

What the numbers tell us from the end of last year is that the bounce back has just began.

With the bumpy road that was 2012, Brazil did have one plus going for it.

It still had low levels of unemployment when compared with other developed countries. Here in the States, we are finally down to the high 7% mark. Brazil’s rate at the end of 2012 was 4.9%. That’s down from December of 2011′s mark of 5.3%. That’s better than India and Russia.

The unemployment rate can probably be attributed to something Americans have become very familiar with – government stimulus. The Brazilian government has increased spending to drive up consumption. In actuality, what the government has been doing is trying to counteract the bad they previously did.

And this stimulus package isn’t going anywhere soon. What Brazil is beginning to see is a country with low unemployment, rising wages and rising income in the middle class that is driving consumer demand. Growth for 2013 seems to be on an upswing from the prior year.

The Brazilian Quantitative Easing and Stimulus Packages

These topics must be discussed because “stimulus package” and “quantitative easing” in this country have become dirty words. Whether that assessment is right or wrong is a whole other article. Instead, I want to give the specifics of what the government and the central bank have been doing.

Let’s start with the Brazilian central bank. It systematically cut interest rates down to 7.25% from that 12% mark mentioned earlier. And just as our Fed would rationalize, they did it to for greater liquidity, to lower consumer debt and as a catalyst for investments.

The government made several expenditures but there was one that was a necessity – and still will be for years to come. Brazil had to spend money on infrastructure because over the next three years it will host the 2014 World Cup and the 2016 Olympic Games.

Brazil should also get some momentum from manufacturing.

The Brazilian government lowered corporate taxes and reduced its payroll tax. If you add the lesser tax burden with better infrastructure due to government spending, you get an uptick in manufacturing activity. Also, a weaker currency should boost exports.

So the formula looks like: low unemployment + lower interest rates = increasing consumer consumption.

How to Take Advantage

All-around growth should be improved and steady going forward because of better infrastructure and the elimination of some trade barriers. Here are ideas that will give you different types of exposure to the country…

MSCI Brazil Index Fund (NYSEArca:EWZ)has been around for some time, being the most seniored of Brazilian ETFs. It’s highly exposed to Brazilian large-cap stocks. More than half of its assets are invested in its top 10 holdings. The fund is also highly concentrated in the financial and materials sector. It was hit hard last year due to the economic slowdown.

Market Vectors Brazil Small-Cap ETF (NYSEArca:BRF)gives you small-cap exposure to Brazil. BRF is also a less top-heavy investment than EWZ. Its top two sectors are consumer discretionary and industrials, respectively. Brazilian small-cap stocks took less of a hit than large caps and have seen a recent bounce back.

Brazil Infrastructure Index ETF (NYSEArca:BRXX)may be the best play of these options as the country seems strongly committed to improving roadways and utilities.The fund has 30 stocks with a total asset base of $81.2 million. A little over half is invested in its top 10 holdings and the fund has made double-digit allocation in electricity, gas, water and multiutilities, and real estate investment and services. Just like the rest of Brazil, the fund has taken a hit. But the fund has recently shown signs of life and is paying a very decent yield.

As we stated back in October, and as I am stating now, Brazil has gone through some issues lately. However, I think the policies adopted by the government and the central bank have put the country back on track. Invest now and get in on the ground floor.

Good Investing,

by Jason Jenkins, Investment U Research

 

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