Over the weekend, we got the good news we needed for U.S. stocks to bounce back. Today, though, we’ll look at why the best stock returns won’t come from American shares…
They’ll come out of Brazil.
Because if this is the bottom, Brazil’s stock market may be the best way to the top.
You see, when developed markets dip, emerging markets usually drop harder. When rich countries turn upwards, however, the gains we see in Brazil, China, India, and other developing economies soar far above North American and European exchanges.
What’s Happened in the Last Few Days
Your American equity portfolio probably looked pretty darn bright Monday morning. Bright relative to the past five dismal trading days, at least. Central bankers from across Europe got behind a $2.42 trillion financial system repair plan this weekend, announcing the following steps on top of Washington’s $700 billion bailout plan:
The British government took majority control of banking giants Royal Bank of Scotland, Lloyd’s TSB, and HBOS, with a 37 billion pound ($63 billion) stock purchase.
Germany’s cabinet authorized a 100 billion euro stabilization fund, with 400 billion more to guarantee bank debt, and
Spain also guaranteed up to 100 billion euros with of bank bonds.
We saw Monday market gains of more than 11% in Germany’s DAX and France’s CAC 40, their leading indices.
While Wall Street and European markets are up, emerging market investors—who got smacked as the Dow turned down—are already tapping the higher recovery potential that countries like Brazil are now known for (see below).
In fact, last Friday, Reuters ran a headline that emerging markets were in a "relentless sell-off" and that sovereign bonds were plummeting. Managers of the Sao Paulo Stock Exchange even halted trading for a half-hour period that day after a double-digit decline in Brazil’s leading index, the Bovespa.
Then on Monday the 13th, the Brazilian benchmark shot up to an 8% gain by lunchtime, consistent with its trend of higher recoveries over the past year. Here we see the Bovespa vs. the Dow industrials since last autumn. Note the separation Brazil achieved on uptrends.
Time To Go Long Brazil: "… more prepared than any country in the world."
A combination of new resource wealth, financial health, and the emergence of millions of citizens into the middle class will put Brazil in the lead of a new world economy in the next few years.
However, where the U.S. is concerned…
Brazilian President Luis Inacio Lula da Silva is not happy with us. Decades of International Monetary Fund restructuring plans dictated how South America should grow, and U.S. protectionist limits against Brazilian sugar ethanol threatened the market-oriented progress we encouraged at the same time.
Under U.S. stewardship, the global economy ended up on the rocks this year, and Lula says it’s time for a "new world economic order" built from developing countries like his, on upwards.
"Important banks — very important banks — that spent their lives giving advice about Brazil and what we should or shouldn’t do are now broke," Lula told a rally in southern Brazil in September.
By reducing debt to foreigners and expanding spending in public projects like infrastructure and essential services, Brazil’s economy is pulling millions up into the consuming class and helping itself away from dependence on the U.S.
"Brazil is more prepared than any country in the world," to deal with the new global economic landscape, Lula said last week in Brazil’s financial capital of Sao Paulo. "Brazil has been preparing for some time to become a solid economy."
Brazil is also "one of the fastest growing oil producers in the world," according to the U.S. Department of Energy, having struck black gold at offshore sites like Tupi and Carioca over the past year.
Those super-deep fields are being developed jointly by select international firms and national oil company Petroleo Brasileiro (Petrobras), which trades on the New York Stock Exchange as an American Depositary Receipt under the ticker PBR.
Hot Brazil Stocks and ETFs To Watch
There are also stocks like Net Servicos de Comunicacao (NASDAQ:NETC), a U.S.-listed provider of cable TV and broadband internet access across the country. As more Brazilians tap into the global information economy, they’re advancing beyond rabbit-ear antennas and internet cafes to household high-speed.
And for a wide base of Brazilian stocks, check out the iShares MSCI Brazil Index ETF (NYSE:EWZ). That fund shot up by over 15% on Monday, reversing a rout that pushed its value from $100 to less than $40 per share over the past six months.
With Brazilian stock holdings like Petrobras and international metal powerhouse Vale (NYSE:RIO) adding to Brazilian banks that have been protected against insolvency issues in the U.S. and Europe, EWZ is a solid bet on renewed global growth and superior returns in that top emerging economy.
Regards,
Sam Hopkins
