Category Archives: Brazil


Emerging Markets Are Hot – Here Is Where You Should Put Your Money

  • Emerging markets are up 10% since our last article on the subject, but the FED’s rate action might quickly erase the gains.
  • Valuations are starting to diverge, but don’t fight the trend.
  • Keep an eye on China as it is relatively undervalued and still boosts economic growth of 6.7%.


In May we discussed how emerging markets have been rediscovered but are still undervalued. Since then, the emerging markets ETF is up 10%.

figure 1 emerging markets
Figure 1: iShares MSCI Emerging Markets ETF (EEM) since May. Source: iShares.

As emerging markets include a lot of countries and segments, in this article we are going to see which segments in emerging markets are the best investments and which hold the highest risks.

What Has Been Going On?

The central reason emerging markets have outperformed is because investors regained confidence in them and plowed more capital into them, unlike in 2015 when the story was the opposite. The fact that developed countries continue with their monetary easing increases risk appetite and forces investors to search for better returns in riskier assets such as emerging markets. This partly explains why emerging markets asset prices have been pushed higher.

Not only do stocks enjoy the benefit of global monetary easing, but so do bonds. As emerging markets have higher yields, desperate investors pursue those yields no matter the risks. But this is a common trap in which many investors have been caught in the past. Think of Argentina. This is a typical textbook situation, when yields are high and increasing, people pull their money out of emerging markets in fear that things might get worse. But when yields are falling, and it is unlikely that things will get better, people plow money into emerging markets. The emerging markets premium in comparison to U.S. junk bonds is minimal, but let’s not forget that by holding emerging market debt you are often exposed to currency risks.

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Figure 2: Difference between yields on emerging markets and U.S. junk bonds. Source: Bloomberg.

Such a low premium suggest that investors should carefully assess the risks before investing in emerging markets at these low yields. But what is pushing emerging markets up is the opposite of what pushed them down in 2015, capital inflows and outflows. Since the beginning of 2016, capital inflows have been increasing.

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Figure 3: Total non-resident capital inflows to emerging markets. Source: Institute of International Finance.

With increased capital inflows, asset prices are bound to go up, but not all emerging markets are enjoying the same investor confidence. China is a good example. Global funds toward China are negative as investors fear the further depreciation of the yuan and slower economic growth.

Fundamental Perspective

From a valuation perspective, emerging markets are still undervalued despite the recent upside. The iShares MSCI Emerging Markets ETF (EEM) has a PE ratio of 11.56 and a price-to-book value of 1.56 which is still far from the iShares S&P 500 ETF (IVV) PE ratio of 20.7 and price-to-book value of 2.88. Chinese stocks are the cheapest with a PE ratio of just 8.24 and a price-to-book value of 1.41 for the iShares MSCI China ETF (MCHI).

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Figure 3: Emerging markets funds. Source: Wall Street Journal.

As our primary investment thesis back in May was that emerging markets are undervalued, the current price increase and investor unwillingness to invest in China make it the probable future winner. To know more about recent developments in China read our recent article on it here.

As global emerging markets are in an uptrend and far from fair valuations, it might be premature to completely jump exclusively into China and ignore other emerging markets. However, as valuations in other emerging markets continue to increase, creating an even larger divergence from China, it might make sense to “overweight” your portfolio toward China, since in the long term earnings are all that matter.

As a point of reference, the Brazil ETF (EWZ) PE ratio is 13.29 while the Indian ETF (INDA) PE ratio is higher at 21.15. Compared to a PE ratio of 8.24 for China.  More daring investors might want to look at Russia where the situation has stabilized but still has low valuations with a PE ratio of 7.36 and a price-to-book ratio of 0.76 for the iShares Russian ETF (ERUS). We’ll discuss more about Russia in a future Investiv Daily article.

For specific investments, the “detailed holdings and analytics” document on the iShares ETFs’ page is a great resource.


When investing in emerging markets, don’t forget about risk. Drops are sudden and sharp, especially around high valuations and low yields. For example, the iShares China ETF (MCHI) is still 28.5% below its 2015 high.

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Figure 4: China ETF. Source: iShares.

The moral of the story is to always look at valuations and don’t get euphoric about emerging markets. Boom and bust cycles are much more frequent than with developed markets due to lower market capitalizations that are strongly influenced by global capital flows which are fickle. We have witnessed two sharp emerging markets declines in the last 12 months—one in August 2015 and the second in January—both of which are a good reminder to not forget that volatility is on the daily menu and another downturn might be just around the corner.

The Fed poses an additional risk to emerging markets if it decides to increase rates due to the tightening U.S. labor market in order to stay ahead of the curve. Higher interest rates in the U.S. would quickly shift capital flows to the less risky U.S. from the riskier emerging markets.


Emerging market are and will stay difficult to navigate. Their volatility is based on low market capitalizations that can easily be influenced with relatively low capital flows when compared to developed markets. Therefore, a good idea is to watch them carefully and not fight the trend because emerging markets tend to move fast in various directions. In January 2016, it seemed like the end of emerging markets was near and now, just 8 months later, it seems all roses.

For investors not exposed to emerging markets, the best thing to do is to look at specific assets that have consistent cash flows and provide diversification. Diversification can also be found in individual companies that have revenues both in the developed world and emerging markets.

Chinese companies have relatively low PE ratios as investors are still not confident about the Chinese economy. Beware that we are not talking here about a recession, but only about growth worries related to China managing to continue growing at more than 6.7% a year.

Stay tuned to Investiv Daily for market updates and specific investment reports on emerging market stocks.


Have Recent Market & Currency Gains In Brazil Just Increased The Risks?

  • Brazil’s economy contraction is slowing and the trend is turning positive.
  • The political situation is currently stable but trouble is always around the corner.
  • Fundamentals show potential but also risks as the price to book value is relatively high at 1.4.


In April we wrote about Brazil and described it as a good risk reward opportunity as all the bad things had already happened. Brazil’s president Dilma Rousseff had just been impeached, the economy had declined by more than 5% and Brazil’s currency was at historical lows against the dollar.

As Brazil is a young country, rich with natural resources, the investing logic was that Brazil is oversold and undervalued from a longer term perspective. As predicted, the currency has strengthened and the Brazilian stock index has increased. This article is going to discuss the current situation, and take a look at fundamentals and economic factors, in order to see if this improvement is backed up by concrete facts or if it’s just a change in sentiment and Brazilian stocks are now riskier than they were three months ago.

Current Situation

The economic situation in Brazil hasn’t improved since April. While the economy did shrink, it only did so by 0.3% in Q1 2016 which is better than expected as the Brazilian Institute of Geography and Statistics predicted a 0.9% contraction. The economy is still contracting but is shifting in trend. The International Monetary Fund (IMF) forecasts a 3.3% contraction in 2016 and then finally small economic growth in 2017 based on business confidence bottoming out and higher commodity prices. The better than forecasted contraction in Q1 shows that Brazil is on a good path to reach growth in 2017. IMF warns that stronger growth is difficult to forecast as political uncertainties remain.

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Figure 1: Brazil’s GDP per quarter. Source: Trading Economics.

The economic shift in trend was immediately reflected in the stock market. The Brazilian stock index has increased by 10% since April and by 50% since the global stock bottom in January.

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Figure 2: BOVESPA index. Source: Google Finance.

But on top of the stock index increasing, international investors have also benefited from the stronger Brazilian Real (BRL). The Real has strengthened by 22% in relation to the dollar since January, and 10% since April.

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Figure 3: BRL per 1 USD last 12 months. Source: XE.

As the 10-year average is 2 BRL for $1, there is still plenty of space for currency gains from Brazilian investments.

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Figure 4: BRL per 1 USD last 10 years. Source: XE.

When Brazil returns to its normal economic growth rates the currency will return to normal levels, thus there is still a 50% potential gain. But for that gain to be realized a lot of things have to improve in Brazil, starting with its politics.

Brazil has an interim president at the moment, Michel Temer, who is trying to stabilize things by limiting government spending to the inflation rate and limit social benefits. Such moves are already priced into the market, but there is always the risk that a left-leaning party takes over as this is just an interim president which could affect prices to the downside. Elections are planned for 2018 but many invoke early elections, especially the impeached Dilma Rousseff who has called for a referendum for early elections.

Political risk is still the main risk for Brazil. With the markets 50% up, any new political turmoil might bring the markets down quickly.


A look at fundamentals shows that Brazil is still amongst the lowest priced global markets. The cyclically adjusted price to earnings ratio, which looks at 10-year average earnings, is 8.5 but the current PE ratio is very high at 44.1 due to the economic crisis and high interest rates. The price to book value is also relatively high at 1.4, thus it does not give much downside protection.

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Figure 5: Fundamental valuation ratios in international equity markets. Source: Star Capital.


Despite Brazil’s political and structural issues, the country remains a promising one. With a population of 200 million, and with a GDP per capita at only $11,208, there is still plenty of room to grow in order to reach a developed level (for reference, the US’ GDP per capita is $53,041).

In the long term, there’s no reason that Brazil won’t eventually return to its previous growth levels of around 3% annually. In the short and medium term, Brazil still has many issues. Apart from the political issues previously discussed in this article, the country also has a constitution that has been amended 91 times in the last 30 years, indicating an instability that consequently makes it very difficult to plan long term investments.

Since we wrote in April, the economy has improved a bit, but it is still contracting. The mere fact that there haven’t been any political scandals recently is not enough to base an investment case. While Brazil looks cheap, a return to power by Dilma Rousseff or any further indication of early elections may increase its risk and send asset prices down.

Until real structural, economic and political developments are reached, higher asset prices and a stronger currency means more investing risk for foreign investors. Traders might want to grasp the opportunities created by the current stability and positive trend, but long term risk averse investors might want to wait for lower risk with cheaper prices.



BREXIT Aftermath: Where to Look for Returns & What to Avoid Now

  • The U.S. and Europe are overvalued, especially seeing the current political situation and economic fragility.
  • What’s about to hit Europe and the U.S. already hit emerging markets in 2015. There are opportunities in emerging markets now, but where?
  • Bonds seem the riskiest asset of all with no yield and huge potential downside.


After last week’s BREXIT vote the markets have been in a free fall with a slight recovery yesterday. But savvy investors have been expecting this and it has been a recurring theme at Investiv Daily that stocks are overvalued. In such an overvalued environment it is normal that inflated asset prices take a beating at any sign of future uncertainty.

As one’s misfortune is another’s fortune, this article is going to elaborate on what to look for and what to avoid in order to limit risks and maximize returns.

The U.S. Stock Market

The U.S. stock market is fully valued and therefore the decline should not have come as a surprise. The S&P 500 has been moving sideways for the last year and a half and many are expecting a recession. In such an environment the risks are high and the potential returns very low.

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Figure 1: S&P 500 PE ratio and earnings. Source: Multpl.

With a PE ratio of 24 and declining earnings, the only way for investors to realize capital gains by investing in the S&P 500 would be through the formation of an asset bubble. With the current political turmoil, slower U.S. productivity, lower employment participation and strong dollar, this seems like a very unlikely scenario.

On the other hand, those factors might start a recession that could easily lower the S&P 500 to the average historical PE ratio of 15 which would cause a 1,300 point, or 35% drop. Therefore, the conclusion is that the S&P 500 carries a lot of risks with limited upside.

Emerging Markets

Emerging markets were the thing to avoid in 2015, but they still possess long term factors that should make them the long term investment winners, especially if bought at these depressed prices. Let us focus on Brazil as an example.

Brazil was hit by various corruption scandals and by the deepest recession in the last two decades. But, Brazil is still a young country rich in natural resources and on the road to becoming part of the developed world, minor setbacks are normal and should be used as an investment opportunity.

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Figure 2: Brazil’s GDP in billions of US dollars. Source: Trading Economics.

Brazil’s GDP grew from $1,107 billion to $2,346 billion in ten years which still represents a yearly average growth of 7.7%. As the market has already factored in the chance of a Brazil bankruptcy, the risks and rewards of investing there are opposite from what they are in the U.S., as there is no risk of a U.S. bankruptcy.

Brazil’s current CAPE (Cyclically adjusted 10 year average price earnings ratio) is currently 3 times undervalued at 8.2, while the S&P 500 has a CAPE ratio of 24.6. The undervaluation is probably the reason why Brazilian stocks have behaved very well in the last few days. The Brazilian stock index is still in positive territory for the month and year to date. On top of the relative stability, U.S. investors could also gain from currency benefits as the oversold real is slowly returning to its real exchange value toward the dollar.

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Figure 3: USD vs BRL in the last year. Source: XE.

To conclude, Brazil represents a young, resource rich country where it seems that all that could go wrong did go wrong last year. More positive news than negative news should now be expected. On top of that, it is one of the most undervalued markets in the world.


The situation in Europe is similar if not worse than the one in the U.S. To put it simply, the markets are in an asset bubble as the European Central Bank has been issuing huge amounts of liquidity with the hope of faster economic growth and some inflation. It succeeded for a while but the BREXIT issue will for sure have a negative impact on current economic growth when coupled with the overvalued markets, the risks outweigh the rewards.

The average PE ratio in Italy is 31.5, Netherlands 28.5, United Kingdom 35.4 and Germany 19. There is also the euro issue where any political turmoil could weaken the euro and lower investment returns for U.S. investors.

Europe should be avoided until asset prices reflect the real state of the economy and the political situation, thus far below current prices, at least 50%.

Gold and Bonds

It is uncommon to put gold and bonds in the same basket but as they both have practically no yield with negative interest rates on the most secure government bonds, it seems the right choice.

Gold is currently at its year high as investors look for safety. The problem with gold is that it has no yield and most investors come too late to the party as gold primarily appreciates at maximum turmoil as it has done in the past few days.

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Figure 4: Gold prices in the last year. Source: Bloomberg.

If political turmoil persists and inflation arrives due to the high liquidity, gold might be the winner, but any signs of stabilization would negatively affect gold. It can be concluded that gold represents a good hedge and could be a part of a well-diversified portfolio. Investors that seek a riskier investment than gold itself could go for gold mining stocks that offer a dividend yield and potential growth, though gold mining stocks also come with much more volatility.

As for government bonds, the risks seem to outweigh the rewards. Yes, it is possible to make capital gains if interest rates further decline, but this defies logic as there is no point in holding negative yielding bonds. On the other hand, if yields increase bonds could fall tremendously as a 100% increase in bond yields should consequently lower bond prices by 50%. Therefore, the current situation with bonds isn’t what’s typically assumed about bonds—low risk with high rewards—as right now they are high risk with low rewards.


At this point, after a 7-year bull market and high liquidity provided by central banks, investors should be wary of being overweight in the same things that were good 7 years ago. Many analysts have forgotten how to analyze risk as we have not seen a bear market since 2009, but this is exactly the time when one should look at risks before rewards. High asset prices and low yields mean that investors do not see much risk and are willing to pay hefty prices, but this is exactly the kind of situation that can bring lots of investment pains.

Any signs of recession, the continuation of the decline in corporate earnings, and a shift from the current investor’s perception that central banks are still able to save the markets with additional intervention, could easily send the stock market down by 30%. Assess your risks, estimate the rewards, and position your portfolio accordingly.


Is Brazil an Investing Opportunity?

  • The political situation is corrupted but the country shows growth potential.
  • From a long term perspective, the market is undervalued and currency effects can bring to gains of 80%.
  • Brazil is still a developing economy with a young population and huge potential.


On Sunday the Brazilian congress voted for the impeachment of president Dilma Rousseff. When the senate, likely in the next few weeks, confirms the vote, the Workers party will temporarily be replaced by a center-right administration government. The move from left to right creates hopes for investors as they look for a more investing friendly environment. Before analyzing investment opportunities, a further note on the political environment is necessary. Of the 513 deputies in the Brazilian congress more than 150 deputies are involved in crimes but are protected by their parliamentarian status and in total 303 deputies face charges or are being investigated for serious crimes, therefore any investment in Brazil has to be discounted for corruption issues that are widespread in Brazil. As the figure below shows Brazil is highly corrupt.

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Figure 1: Corruption perceptions index 2015. Source: Transparency International.

This means that the rule of law is weak and some logical investment decisions or expected results might be completely turned around by corruption issues.

Brazilian Economy

On the other hand, the Brazilian economy is the 7th World economy with a GDP per capita of $15,153, thus with still lots of room to grow in order to reach the developed levels. In addition, it has a young population with 40% of the population being younger than 25 (US – 33%, Germany – 23%). Also Brazil is rich in natural resources ranging from iron ore to agricultural products. All these positive circumstances strongly influenced Brazil’s economic growth in the last 25 years.

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Figure 2: Brazil’s GDP annual growth rate. Source: Trading Economics.

Except for the 2009 crisis and some minor recessions in the past Brazil has seen high levels of growth in the past. The question now is: Is the current recession a temporary and natural halt to the growth cycle or there are deeper structural reasons that will disable Brazil’s future growth? With the current political situation it will for sure take a while before things return to the previous growth levels but for those investors that stick to the “Be greedy when others are fearful and be fearful when others are greedy” Brazil might be the place to look at.

Investment Perspective

All this political turmoil and economic recession resulted in the fact that Brazil is among the cheapest markets by the Cyclically adjusted price earnings ratio (uses 10-year average earnings for PE ratio calculation).

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Figure 3: Brazil’s CAPE ratio. Source: Star Capital.

The average normal PE ratio for Brazil is high at 42 but that is logical due to the current recession and high interest rates. Any improvement in Brazil could quickly bring the CAPE valuation to a more appropriate one for such a young, rich in natural resources and still developing country.

Another potential catalyst is the Brazilian currency. From a stable range of R$1.5 to R$2 Brazilian Reals for one US dollar the Real had depreciated to R$4 for a dollar in 2015 and currently the exchange is R$3.61 for a dollar.

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Figure 4: BRL per 1 USD. Source: XE.

Any indication of a political stabilization and a positive economic outlook would quickly improve the exchange rate and create currency gains for foreign investors. The current base interest rate in Brazil is 14.5% which implies that there will be strong demand for the currency if the investment environment stabilizes. A return to the exchange levels prior to the current economic crisis of R$2 for $1 would create returns of 80% just from currency benefits.

Another positive for Brazilian companies is their surprisingly high level of financial transparency. The financial statements are easily accessible on most of their investor relations web pages and also translated into English.

How to Invest

The easiest way to invest in Brazil for foreigners is through American depositary receipts (ADR) of Brazilian companies traded on the US stock exchanges. Below is the list of the 25 Brazilian ADRs traded on the US stock exchanges.

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Figure 5: Brazilian ADRs. Source: TopForeignStocks.

Another option is to invest thorough Brazilian ETFs. Some of the most popular are the iShares MSCI Brazil Capped ETF (EWZ) that tracks the MSCI Brazil 25/50 Index and the Market Vectors Brazil Small-Cap ETF (BRF) that tracks Brazilian small-caps.

Current Situation

The current market situation shows that the bottom in the Brazilian market was reached in January 2016 with a low of 37,497. Since then it has grown to the current 52,894 or 40% influenced by the expectation that a new government will improve the situation and the 15% appreciation of the Brazilian currency.

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Figure 6: Brazilian stock index BOVESPA 1-year chart. Source: Bloomberg.

The latest 40% surge creates an uneasy feeling of being late to the party but positive economic news and political catalysts could further improve the situation.


Investing in Brazil should be considered high risk because as the market grew 40% in the last few months, so it can quickly decline. On the other hand, the risk/reward is very tempting. Signs of economic strength or a positive outlook would quickly strengthen the currency and bring to immediate gains. Consequently, a lower base interest rate would bring to a much needed relief for Brazilian businesses. The average CAPE of 8.2 further increases the upside potential. South Africa, a country that can be compared to Brazil, has a CAPE ratio of 19.1. A similar CAPE ratio for Brazil would mean a 100% gain on top of the potential currency gain. But, the risks are also very big. A continuation of the current political turmoil does not help a country in economic trouble. New political scandals like the Petrobras scandal where 100 people, including senators and top executives have been arrested, could happen in almost any company in Brazil. An example of how high the corruption goes in Brazil is that the president Dilma Rousseff was a chair at Petrobras when the money laundering activities started back in 2004. Further political instability could further destabilize Brazil, weaken its currency and quickly reverse the above mentioned potential gains. Investor must be aware that although Brazil has a potential for 100% returns, it also has the potential of huge losses.