Russia has been stealing most of the emerging market headlines over the past six months and particularly this week, as Russia and Ukraine appear to have reached a ceasefire deal.
I recommended the Market Vectors Russia ETF (RSX) in July following the post-MH17 selloff, and I would reiterate that recommendation today. After Greek stocks, Russian stocks are the cheapest in the world, trading at a CAPE of just 6. At prices like these, a value investor can afford to be patient.
But while Russia has been stealing the headlines of late, Brazil has been quietly enjoying a monster rally. After bottoming in early February, the iShares MSCI Brazil ETF (EWZ) has risen an almost astonishing 40%.
After a run like that, it’s fair to ask: Have we already seen the big move, and are we late to the party?
Let’s put it in context. Brazilian stocks have arguably been in a bear market since 2008. Brazil, along with most of the rest of the world, enjoyed a fantastic rally in 2009. From late 2008 to late 2009, EWZ returned about 170%. But EWZ never regained its old 2008 highs, and it has spent most of the past four years drifting lower. Even after the 40% run since February of this year, EWZ would have to nearly double just to see its old 2008 high. (Currency movements have also played a role here; the Brazilian real has gone from being massively overvalued in 2010 to only modestly overvalued today, using the Economist’s Big Mac index as a rough guide.)
Brazilian stocks are also quite cheap by the inflated standards of today’s markets. Brazilian stocks trade at a 10-year CAPE of just 10.
Furthermore, there is a growing consensus that, whoever wins the coming presidential election, Brazil will be adopting a more market-friendly policy regime.
Action To Take
Buy EWZ and plan to hold for 12-24 months and possibly longer for returns of 100% or more. Use a 25% trailing stop.
What Could Go Wrong?
The Fed. Frankly, no one really knows what will happen when the Fed eventually tightens its monetary policy. The so-called “taper tantrum” sent Brazilian stocks sharply lower last year, as investors feared that the resulting loss of liquidity would pull capital out of Brazil and other emerging markets heavily dependent on foreign inflows. But as tapering has progressed over the past year, the Brazilian market appears to be adjusting just fine. Could a surprise rate hike by the Fed rattle investor confidence in emerging markets in general and Brazil in particular? Yes. But given that the ECB and Bank of Japan are actually getting more accommodative, I suspect that any aggressive Fed moves will be neutralized.
