What to Expect From Brazil, Colombia Equity Markets
If Brazil succeeds in boosting the real, you're better off in US stocks. A weaker peso could mean Colombia outperforms the US.
Two Countries, Two Decisions
It is worth noting, therefore, the opposite decisions taken last week by Brazil and Colombia. The Brazilians have been concerned with rising inflation and a downturn in the real (CURRENCY:BRL) and intervened to support it while the Colombians have been concerned with the strength of the peso (CURRENCY:COP) and intervened against it with the intention of driving it significantly lower. Colombia cut its benchmark interest rate to 4%, the lowest in Latin America; such a thing is possible when your consumer price index comes in lower than expected.
Opposing moves of this nature are reminiscent of those undertaken in the early 1990s by the US and Germany; we were cutting our rates, allegedly to stimulate the economy, while the Germans were raising theirs to fend off inflation resulting from reunification. Markets trumped both central banks by weakening the dollar against the deutsche mark and by having our yield curve steepen while Germany's inverted. If last week COP per BRL exchange rate is any indicator – and if you do not have this on your screen, put it there right now – the peso will weaken against the real.
Stock Market Response
What should we expect from their respective equity markets? Brazil enjoyed a huge run between 2002 and 2007 and it met the No. 1 criterion for inclusion in many investors' portfolios: It was the 'B' in BRIC, and there is no better reason to invest in anything than a catchy acronym. However, it did not duplicate that experience coming out of the financial crisis as the BRL's strength appeared to reduce the competitiveness of Brazil in global markets. Should they succeed in boosting the BRL, you will be better off in US stocks.
Once again, the picture is diametrically opposite for Colombia. Their market was a world-beater, literally, between 2001 and 2010; they were right up there with Indonesia in the mega-return department. Their market has languished since October 2010. A weaker COP should put Colombia in position to outperform the US.
You can access Colombia through vehicles such as Market Vectors Colombia (NYSEARCA:COLX); long ETFs on Brazil include iShares MSCI Brazil (NYSEARCA:EWZ). I should add, given my negative relative opinion on Brazil, there are short ETFs such ProShares UltraShort MSCI Brazil (NYSEARCA:BZQ), but let's just say I am not a fan of leveraged short vehicles.
Finally, it is important to remember the whole guilt by association comment. Just because we get lazy and attach broad labels on disparate markets that does not make all "emerging markets" act like a monolith. Latin American, South and East Asia, Eastern Europe and the so-called frontier markets are very different from each other. Even within a region such as Latin America, Brazil, and Colombia can and have gone their separate ways.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter