Saturday January 30, 2010
By Carl Delfeld, editor Chartwell ETF Advisors
It is a little like catching a falling knife in the wake of the sharp pull back in emerging markets, but you might want to take a small position in Brazil Small Cap (NYSE: BRF).
Brazil’s currency, the Real, remains one of the most attractive in the world up 27% in the past year and foreign exchange reserves are at $240 billion.
The strength of an economy’s currency is generally a good reflection of the strength and health of the economy. Brazil is also exhibiting strong growth coupled with relatively low debt. It is just about the only investment grade country where inflation is slowing with an inflation rate of 4%, at the low end of the range of the past decade.
Brazil’s exports are diversified and its current account is in very small deficit, at just over 1% of GDP. On the debt side, the country has a 12% gross external debt and 43% government debt as a share to GDP (the US numbers are 95% and 62% respectively).
An argument against Brazil would be that commodity prices (as the US dollar rises) are pulling back and that Brazil is seen as basically a commodity play.
The reality is that Brazil’s major exports are manufactured goods and that BRF offers investors 40% exposure to consumer product and services companies - a great play on the rising middle class in Brazil.
The catalysts behind this recommendation are that emerging markets are perhaps oversold and that Brazil is the most attractive of all the BRICs, with the exception of high political risk, energy heavy Russia, on a price to earnings basis.
The risk factor is high and I suggest using BRF only in moderation and using a 6-8% trailing stop loss.
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