Soccer is simple, but it is difficult to play simple.
Emerging markets were the biggest beneficiary of the Fed's “surprise” decision to not taper, surging in a way that seems to have caught many by surprise. Some argue that the move is too extreme with a complete melt-up in September for the BRICs, but the reality is that the move in the fat pitch is merely a blip. The spread of most emerging market indicies to the S&P 500
(INDEXSP:.INX) is still illogically wide on a year-to-date basis, and those who were looking for a catalyst to buy foreign shares just got it with continued money printing from the Fed.
Brazil looks particularly interesting given negativity on the country's future growth prospects, despite the fact that every day that goes by we get closer to the 2014 World Cup which can be a big booster to growth.
Take a look below at the price ratio of the Market Vectors Brazil Small Cap ETF
(NYSEARCA:BRF) relative to the S&P 500. As a reminder, a rising price ratio means the numerator/BRF is outperforming (up more/down less) the denominator/SPY. I choose small-caps here because they are more sensitive to domestic growth expectations than multi-national large-caps.
Yes – Brazil's stocks in September have had a big move, but from a price-ratio perspective it is nothing more than a blip off of deeply oversold levels. More than that, this momentum appears very early. I don't think many really appreciate just how poorly everything outside the US has done. With China stimulating, Brazil also could easily see a pickup in export activity and demand for its commodities. This could explain why the real (NYSEARCA:BRF) is also getting bid higher.
Move over? I don't think so. There is still significant catch-up and mean-reversion potential from both the currency side and equity side. While I have been using baseball as the analogy for the fat pitch of emerging markets, it might be better to use “football” (our soccer) when it comes to Brazil:
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