Introducing A New Roller Coaster: Brazil
Brazil’s economy has been on a drop due to significant and near fully priced in risks. Short sellers should be cautious for a rebound in commodity prices and an expanding middle class in this region. For broad exposure to the Brazil economy investors can buy EWZ while it trades at a discount to historic valuation. Let’s discuss Brazil. While their soccer team has been a top performer notching more world cup titles than any other country, unfortunately their equity prices have been consistently inconsistent. (click to enlarge) Brazil has been an easy money short-sell due to the market conditions including lower commodity prices, a weakening currency, high inflation, political instability, and minimal forecasted GDP growth. Examine the chart below, commodity prices based on this ETF are trading at half their value as compared to last year. (click to enlarge) The country’s currency continues to weaken, and the GDP growth has been moving in the wrong direction. The 5 year average GDP growth has been 3.2% and the 10 year average is slightly above at 3.4% according to Worldbank . For the next four years, the GDP growth is estimated to be an average of only 0.5%. While the current P/E based on historic growth of this region is promising, if you trust future estimates, the outlook remains bleak. Another risk which isn’t necessarily a new risk, is political corruption . The Petrobas scandal which was a state-owned oil company has essentially put the president at risk of impeachment. While inflation is a risk for Brazil overall, it may not be a huge concern for investors in iShares MSCI Brazil Capped (NYSEARCA: EWZ ). In fact, value stocks can be a good hedge against inflation (especially as compared to growth stocks). Looking at the equity style box accessed from Morningstar , you’ll notice this fund is value weighted. As prices in Brazil continue to fall, yields may become more attractive to investors. Continuing to drill into the Brazil ETF EWZ, a bullish story begins to unravel. For the fund itself, if you take the P/E divided by the long-term earnings % it creates a PEG of 0.88. This type of PEG is hard to find for a major country like Brazil. If you take the PEG ratio of the fund as compared to the historic or future GDP figure, however, you will be disappointed. The bull story here is that the P/E is attractive, commodity prices in the country’s abundant resources may rebound, the young population and expanding middle class may fuel growth GDP growth over consensus estimates, and the political environment may stabilize. I believe the short sellers should proceed with caution at this price level. If equity prices continue to fall the risk versus reward is going to be look quite lucrative in this region of the world. Digging deeper you will see below the five most heavily weighted stocks in the fund EWZ. This is a list I created which is why the quick descriptions are not in great detail. This is meant to provide a better picture of what an investor really is buying when they own this ETF. In these top five stocks which make up 36% of the total fund weight, you will notice the style is mostly consumer defensive and financial services. If the score 1 meant long and 10 indicated being short, I would sit at about a 4 today. Only slightly on the bullish argument at this price level. This country is one that I will be watching closely, and will add funds to if any of the bullish opportunities unravel. For now, I will be looking to enter a small amount of capital as I sit back and enjoy a nice yield with a good beverage . If you agree with the bear argument, I’ve already picked out a fund for you. My advice is to keep a close eye on Brazil because once the economy shows signs of light, equity prices will lift rapidly. (click to enlarge) Since July 1, 2000 this is the performance of Brazil as compared to the S&P 500. Brazil is clearly a roller-coaster ride, one that it does not pay to sit on forever. Get in when assets are cheap, and sell when they trade at a premium. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EWZ over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.