Category Archives: Brazil

The press as a lagging indicator, continued

Folha de Sao Paulo has made this easy for us. Here are a couple of Economist covers, four years apart:

2013.09.26 Brazil Economist cover

Honestly, when it’s not so tiresome, it’s actually amusing how blind people can be. I honestly have too many previous ramblings on this topic to list them all but if you’re interested, you can find them somewhere among these.

Also, there’s this:

A Diplomatic Way Of Saying A BRICS Development Bank Is A Stupid Idea

Dani Rodrik has this in Project Syndicate today:

It can be cause only for celebration that the world’s largest developing economies are regularly talking to each other and establishing common initiatives. Nonetheless, it is disappointing that they have chosen to focus on infrastructure finance as their first major area of collaboration.

This approach represents a 1950’s view of economic development, which has long been superseded by a more variegated perspective that recognizes a multiplicity of constraints – everything from poor governance to market failures – of varying importance in different countries. One might even say that today’s global economy suffers from too much, rather than too little, cross-border finance.

What the world needs from the BRICS is not another development bank, but greater leadership on today’s great global issues. The BRICS countries are home to around half of the world’s population and the bulk of unexploited economic potential. If the international community fails to confront its most serious challenges – from the need for a sound global economic architecture to addressing climate change – they are the ones that will pay the highest price.

Yet these countries have so far played a rather unimaginative and timid role in international forums such as the G-20 or the World Trade Organization. When they have asserted themselves, it has been largely in pursuit of narrow national interests. Do they really have nothing new to offer?

Read the rest here.

What The BRICS Really Have In Common

2013.03.28.BRICS as The_Breakfast_ClubSometimes news editors exercise such brain-dead judgment that it’s a wonder journalism as a practice even survives.

That sentence was one of a few I conjured up as a possible lead-off thought. Well, technically, it was the only sentence, since the rest are thoughts posed as questions. Here they are:

Is the BRICS Durban conference officially the acronym’s 14th minute of fame?

When will the country grouping of France, Uganda, Chad, Kenya, Oman, Fiji and Finland finally supplant the BRICS as the political economy cadre du jour? What about Bulgaria, Uganda, Lithuania, Latvia, Spain, Haiti, Italy and Thailand?

2013.03.28.bric_summit_durbanDoes anyone honestly still believe in the BRICS as an investment theme?

Am I the only one seeing that Brazil, Russia, India, China and South Africa may actually have less in common than a brain, an athlete, a basket case, a princess and a criminal?

What drives this apparently human need to shrink everything down into bite-sized archetypal infonuggets?

Continue reading

The Carry Trade Is Dead. Long Live The Carry Trade.

2013.03.13.USD MXN BRL Carry TradeMy latest Seeking Alpha article is out, in which I try to make sense of why the Mexican peso is strengthening on the heels of an interest rate cut by the Bank of Mexico on Friday. And the short answer is that the carry trade is dead. Read the rest here, but what I can add to this argument is actually something that I’m surprised nobody has taken me task for in the comments section yet and that is this: the carry trade isn’t entirely dead. Brazil is in all likelihood about to raise rates again and the expectation is that this is going to strengthen the real.

Which raises the next question: Why is the Mexican peso resorting to the theory of interest rate parity while the Brazilian real is is adhering to the anti-theory of interest rate parity in the form of the carry trade?

Stay tuned.

China Latin America Trade: Who’s Dependent On Whom?

Yes, I am obsessed with charts. And if you’re still reading this blog with any regularity, you are too. Especially if they’re about China Latin America trade.

I finally had a chance to dig through a BBVA report from last month entitled, “How dependent is Latin America’s Economy on China?” Following are the essential takeaways.

  • Commodities have always taken a significant share of Latin American exports; the level of commodity exports concentration had been declining until the start of this century, which coincides with the further involvement of China in global markets.
  • The shift of China’s economic model makes it the biggest contributor to world commodity demand and the top importer of Latin America’s natural resources.
  • There is a positive China effect on commodity exports concentration; the dependency on Chinese demand for sample commodities has indeed increased during the last decade.
  • However, Latin American countries’ economic growth is far less dependent on China than the commodity exports figures might imply.

Now with those overview bullets out of the way, the first chart that strikes me is shown a few different ways but all with the same conclusion. This is one of the versions, demonstrating the proportion of each country’s exports that are commodities:

2013.03.12.Latam-China commodity exports percent share total

Continue reading

Basic Strategy For Hyping An Investment Trend

2013.03.11.PlanetHypeI’ve seen this happen so many times, I could teach a class on it:

  1. Take a small data sample of something that confirms the view you’re determined to promote;
  2. Regardless of how rigorous the methodology or how representative the sample size, declare that this is indicative of a broader trend–forest for the trees or some such thing;
  3. Willfully ignore any aspects of this declaration that remotely contradict your view;
  4. Deny/insult/discredit/lash out at anyone who tries to take an even-handed view on it;
  5. Begrudgingly concede that nothing is perfect but that a positive attitude is what counts;
  6. Neglect to make clear the very pertinent fact that you have a vested interest–financially, politically, reputationally–in a positive outcome which therefore inhibits your own objectivity;
  7. If your lawyers insist, loosely outline the caveats to your opinion and bury them somewhere where they are least likely to be noticed (“past performance is not indicative of future results” is the boilerplate here);
  8. Debunk the caveats by paraphrasing points 1 and 2 and emphasize the probability your forecast will prevail;
  9. Lather;
  10. Rinse;
  11. Repeat.

Now, let’s consider a brief list of where we’ve seen this template applied in the recent past:

Continue reading

Chart Of The Day: Emerging Markets Currency Wars Landscape

This is interesting:

2013.03.06.Swan FX Diagram

2013.03.06.Swan FX Table

And here’s an explanation of what we’re looking at:

Continue reading

Brazil v Mexico, round 832: The Economist challenges the NYT as Contrarian Bellwether

Thanks to David Agren for drawing my attention to the following. Animal Politico poses the following question, which is not the first time I’ve heard this thesis, but is the most recent incarnation of it: Are The Economist magazine covers a contrarian indicator? Specifically, consider that this is what Brazil’s economic performance looks like since the famous cover illustration of Rio’s Christ the Redeemer as a rocket ship, with the headline, “Brazil Takes Off”:

2013.02.12.Brazil GDP post-Economist cover

For those in need of a refresher, here’s the cover in question:

2013.02.12.Economist Brazil cover

If you buy into the notion that such an indicator does have predictive value — which I partly do, and I’ll explain in a moment — then consider this cover, published last November:

2013.02.12.Economist Mexico cover

Now consider this statement, which I’ve translated, from Animal Politico:

What has happened with the Mexico economy that produced such a change of expectations from the British magazine? What is it basing its optimism on? Is it justified?

In principle, there does not appear to have been a change of anything substantial or profound in the Mexican economy. The only observable change is political and it has to do with a change of government and, above all, with a change in the discourse of the new government. This is due to the new administration having emphasized economic reforms that it intends to implement, while talking less about the violence and insecurity of the country even though these factors have not diminished on an absolute basis. Nevertheless, apart from this, there does not appear to be in reality many reasons to anticipate a radical or profound change from an economic perspective for the country.

This is the key passage to pay attention to. And I honestly do not know that I could have said it any better myself.

What also strikes me here is the difference in how different actors respond to economic developments. Anyone with skin in the game from the standpoint of market exposure comes to certain conclusions a long time before the rest of the world and voices such opinions by buying or selling as appropriate in the particular market or markets in question. Put another way, the smart money has already moved on to other matters.

The nature of political discourse is such that some greater degree of measurable certainty is required before articulating a view. I used to consider this characteristic a shortcoming of political actors, something akin to a mental deficiency, but I now recognize it is merely a logical outcome of how arguments and actions are constructed in that sphere. I’ve been saying this for a long time, and it applies here too–the order of actors who show up to a geopolitical or economic disturbance tends to generally adhere to the following scheme, and this is by all means a theory in flux, so if anyone disagrees or has other points to add, please feel free:

1. criminals/black market/other extralegal profiteers
2. certain NGOs (such as those emphasizing acting more than thinking)
3. “legal” profiteers – adventure variety (frequently sold to by #1)
4. lawyers
5. “legal” profiteers – mainstream variety (frequently sold to by #3)
6. consumers (frequently sold to by #5)
7. media
8. certain other NGOs (such as those emphasizing thinking more than acting)
9. politicians
10. academia

Finally, bringing this back to the Brazil v Mexico neverending faceoff…I’m making no secret that I’m seriously considering shorting the iShares Mexico ETF, which goes by the ticker EWW. Those inclined toward technical analysis may do what you may with the following chart. But if you’re at all inclined to believe the hype about Mexico, I would simply respond: Believe nothing until you see it.

2013.02.12.Mexico EWW ETF chart

Carry trade returns: winners and losers as of mid-November

From the Hindu Business Line:

Though this comes from a story headlined, “Rupee depreciation erodes carry trade returns”, it’s interesting (though perhaps not surprising) to note that Asia is nowhere in this table.

Rapid Growth Markets: Behold THE FUTURE

I’ve just spent way too much time playing with Ernst & Young’s interactive spider graph thingy that allows you to compare their 25 “rapid-growth” markets across a range of macroeconomic indicators. According to E&Y, these 25 countries possess the most promising “long-term potential to generate strong business opportunities.”

So since a picture is worth a thousand words, here’s how all 25 of these economies will change from 2011 to 2016 from the meta-macro view, compared against each other:

Okay! Is everybody ready to go out and make some money?
Continue reading

9 Emerging and Frontier Markets Uncle Sam wants YOU to export to

On the heels of the latest update to the World Bank’s annual Doing Business index, I thought I would use this opportunity to try a different take on the usual blather surrounding this study about which country did or didn’t move up five spaces in the shareholders’ rights category.

I recently happened to attend a function sponsored by the US Export-Import Bank that was part of its Global Access for Small Business Initiative. In the interest of not getting bogged down here by too much bureaucratese, the nutshell of this initiative can be summed up as such:

“Increasing exports and access to foreign markets is a proven tool for strengthening our economy and creating durable jobs. The United States is well positioned to capitalize on the types of products and services that fast-growing markets around the world are demanding. Ex-Im Bank is committed to ensuring that American small businesses can compete in this global climate.”

For those not in the habit of tuning in to this sort of thing, this initiative basically is targeting American small businesses looking to export to emerging and frontier markets. At first glance, this isn’t too far off from what the Overseas Private Investment Corporation (OPIC) does, but the focus here is less about investing overseas and more on businesses looking to export overseas. Where exactly overseas? Officially, anywhere, but Ex-Im representatives made a point of letting the audience know that those looking to export to the following nine countries would receive special attention, determined by “a variety of macroeconomic indicators”:
Continue reading

On navigating the choppy waters of logistics, supply chain and customer relations

BEWARE: the less sexy something sounds, the more important it probably is. And so it is with the practical realities of what could easily pass as another of my Street Markets columns had I gotten to a certain Gerardo Mendoza first. In any event, Frontier Strategy Group reminds us of a reality that is sometimes easy to forget, and though the context here is the pharmaceutical industry, this could be anything really:

“Many pharmaceutical companies in Brazil have relied too heavily on distributors. The distributors have grown up to become indispensable partners. And as the market has grown, distributors have undergone a flurry of M&A activity amongst themselves. Now some pharmaceutical companies have to reach their end customers through distributors that have larger annual revenues than their clients, and they gain that revenue from a more diversified set of partnerships. This has led, and is continuing to lead, to a significant imbalance of power in the producer-distributor relationship. Continue reading

Templeton places its Emerging Markets bets

They said it, not me:

“These emerging countries generally do not have the indebtedness problems that developed countries in general currently have, and even though their absolute growth is slowing on a relative basis, emerging growth rates remain much healthier than developed growth rates. There are exceptions, but by and large we see a lot of value in many of these countries, but we would be cautious that there are going to be inflationary risks. We think it’ll be good for currencies but we would be cautious about taking a lot of interest rate risk. Continue reading

The most badass Brazil v Mexico economy chart you’ve ever seen

BBVA Research has just published the Mac Daddy of all Brazil-Mexico economic research charts. Go home, Poseurs:

I’m not sure what the general relationship is between length of time required to digest a graph versus usefulness of the graph, but at least in this case there’s a lot to think about. Here are some of the takeaways BBVA draws from this, not all of which I totally buy into:
Continue reading

Mexico, the new Brazil, when it was the new China, before Africa and Switzerland showed up

According to the Financial Times, in perversion of all perversions, we’re now supposed to believe that Switzerland is the new China. Got that?

“Switzerland is the new incipient China,” said Steven Englander, Citigroup’s head of foreign exchange strategy.

Apparently, Switzerland’s attempts to keep the franc artificially weak while building up its central bank reserves make it so.

Well gee. Not too long ago, Brazil was supposed to be the new China:

That is, until Australia was dubbed the new China, at least as far as General Electric is concerned:

Continue reading

Olympics and World Cup effects on Brazil’s economy and FX

This is an impossible question to really ever answer definitively but I’ve been wanting to try for a while now. And it seems that Goldman Sachs has beaten me to the punch, at least partly—they’ve published a report detailing the relationship between hosting the Olympics and variety of economic performance indicators. After reading the report I appreciate how unrealistic it would have been to attempt something like this on my own and there’s a lot in there that makes for a good rainy day read. What I was most drawn to was the blurb on correlation between the Olympics and the local FX market as expressed through the host country’s real effective exchange rate.
Continue reading

Run for Cover: Brazil’s credit blowout has officially begun

Moody’s downgraded eight Brazilian banks, bringing them in line with the country’s sovereign rating. The broad problem they all share, in a nutshell, is twofold: slowing economic growth and lower interest rates, the latter driven almost exclusively by the country’s own central bank and President Rousseff. The idea behind forcing lower interest rates was nominally to make credit cheaper to Brazilian consumers, but apparently there hasn’t been enough of an increase in lending to make up for the profit margin squeeze. Not helping the situation is a spike in household debt.

Also, Eike Batista’s oil firm lost 25% in market value after the company said its first two wells would produce less than one-third of anticipated estimates.

Also, the real is swiftly heading for 2.10 against the dollar for the first time since 2009.
Continue reading

Colombia’s Ecopetrol = Brazil’s Petrobras means it’s time to sell

I’m in transit at the moment so I don’t have time for daily headlines today, but I do have a piece on Ecopetrol running on Emerging Money:

Last week’s announcement that Colombian oil company Ecopetrol passed Brazilian giant Petrobras to become Latin America’s largest company by market capitalization was a tribute to how far Colombia has come since the 1990s. It was also a nice complement to the effective start of the country’s free trade pact with the United States. And it was a sign that investors should think about selling Ecopetrol.

Petrobras is already back on top in the market cap rivalry. The Colombian economy may be a model, with 5% real GDP growth, low inflation, booming foreign direct investment and a successful dismantling of what was once the world’s largest black market for dollars.

Even emigres are returning home to this tiger that used to be better known for cocaine trafficking.

But virtue cannot put hydrocarbons in the ground. Brazil’s proven oil reserves are estimated at six times the size of Colombia’s, according to the CIA Factbook. That means Petrobras is virtually destined to be a much bigger oil company that Ecopetrol.

Ecopetrol could not have managed its recent rapid growth much better than it has. It has better efficiencies of scale than Petrobras, but that efficiency is at least close to being fully priced in.

The company has quadrupled in price since the end of 2008.

Ecopetrol’s drawing even with the mighty Petrobras also reflects a Colombian peso that is stronger – or should we say less weak – than the Brazilian real. But that situation also cannot last forever, given how integrated both countries are in trade with the US, trade with China, and global commodities markets.

Colombia cannot afford to have the peso/dollar relationship diverge significantly from the real/dollar; its exports will become too expensive.

The Colombian central bank may not be anywhere near as vocal (desperate?) as its Brazilian counterpart in what is effectively a managed currency devaluation, but the Colombian peso is approaching its maximum appreciation limit. The higher it goes from here, the sooner we should expect monetary authorities to intervene to weaken it.

Nor can Ecopetrol buck a global macro “risk-off” environment forever. If the result of the current queasy market mood is not a weaker peso, it may be lower oil prices, which would imply a stronger US dollar, which leads to a weaker peso.

If it’s not slower growth at home, it’s slower growth elsewhere, which lowers demand for exports. Colombia’s trade is already more US-dependent and less diversified than Brazil’s, and the implementation of the free trade pact is only going to make it more so.

This does not mean that Ecopetrol shares are due to crash. They may even have a bit more room to run, as Colombia continues to meet its challenges and investors overcome past stereotypes and realize what the country has achieved. But the end of the upside for this stock cannot be far away.
This article was originally published here.

Avoiding Brazil FX volatility with domestic ETF plays

Brazil’s policy of weakening its currency to make exports more competitive has worked – maybe too well.

The real has lost 13% of its value against the dollar since March 1 to trade at just about 2:1. The Bovespa stock index has slid by almost exactly the same amount during that time, making the currency’s future an all-important indicator for equity and ETF investors, but one subject to contradictory forces.

Even the president of the Brazilian Exporters Association said last week he prefers a stronger real in the 1.80-1.85 range. Yet unnamed currency speculators told Forbes they see a further nosedive to 2.2.

What’s driving bearish sentiment on the real is President Dilma Rousseff’s determination to push domestic interest rates lower. Earlier this month, she issued a decree removing the floor on interest paid by a popular form of savings account, although this controversial move requires congressional approval within 120 days.

This should allow the Brazilian central bank (BCB) to continue cutting its prime rate for commercial lending, known as the SELIC rate, currently at 9%.

Several reports indicate the BCB is seeking a real savings rate of 2%, which is equivalent to the SELIC rate minus inflation. With inflation over the past 12 months averaging 5.25%, that implies a desired Selic of around 7.5%. This will broadly drive real-related investments toward further depreciation.

But other factors point to the real holding at current levels if not strengthening. The inflation rate remains above the BCB’s stated target of 4.5%, though it is down from a seven-year high of 6.5% at the end of 2011.

The central bank, after buying dollars through most of March and April to fuel the real’s decline, has gone comparatively quiet in the currency markets this month. The closer inflation comes to breaching 6.5% again, the more likely the BCB is to re-intervene in the opposite direction to stem continued BRL weakening.

Brazil also has two looming public events: the soccer World Cup in 2014 and Olympic Games in 2016, that will require massive investment, including probably some from abroad. Foreign direct investment into Brazil has become more difficult to define in recent years, as inflows have to evade the obstacle of capital controls.

But to the extent that event-related spending comes from overseas, this is a force for a strengthening the real.

What is for sure is that the World Cup and Olympics will drive sustained infrastructure spending, most of which will stimulate domestic manufacturers and contractors. Meanwhile cheaper money and abiding inflation will drive consumer spending, while much of the benefit the devalued real brings to exporters is offset by weaker global commodity prices.

That means the best way to bet on a Brazilian equities rebound is to stay away from all things exposed to currency volatility or commodities and stick with anything inwardly focused on Brazil. Retail investors can access the domestic sectors through four different ETFs: Global X Brazil Consumer (BRAQ) , Global X Brazil Mid-Cap (BRAZ), EG Shares Brazil Infrastructure (BRXX), or Market Vectors Small Cap (BRF).

This article was originally published at Emerging Money.

Latin America Infrastructure Project Finance: the top 100

Brazil, Mexico, Peru and Colombia account for two-thirds of the top 100 infrastructure finance projects in Latin America this year, which collectively will total nearly US$200 billion, according to a report by CG/LA Infrastructure, Inc. By sector, the favorite is transportation, accounting for US$90 billion, half of it in Brazil. The obvious indication here is that this is Olympics and World Cup preparation. I’ve refashioned the data in the following graphs to give a more (to me, at least) comprehensive visualization of these numbers:

Continue reading