Brazil, A Great Investment To Add To Your Portfolio?

By: ispeculatornew
Date posted: 06.03.2011 (5:00 am) | Write a Comment  (0 Comments)

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The U.S. economy is turning into that cousin nobody really likes. We put up with him because he has money but he smells kind of funny and at family gatherings he drinks too much and ends up telling bad jokes. By the end of the party he has worn out his welcome and now people are just hoping he will leave.

Okay enough with the long-drawn out metaphor. The reality is that the U.S. economy is in some very big trouble and investors could end up holding an empty bag. In an interview earlier this month, Secretary Treasurer, Timothy Geithner said that the U.S. could reach its debt limit of $14.3 trillion and would be forced to default on its debt obligations. The chances that this will happen are slim to none but even the fact that we are discussing it is bad.

There is a lot of political chatter about how this is probably just an artificial deadline and that it doesn’t mean anything; however investors need to take this seriously because the markets are. According to a recent article by Bloomberg, all this default talk is causing a sharp rise in Credit Default Swaps (CDS). Without sounding too complicated, CDSs are sort of like insurance policies for bond investors. If you think a company or even country is going to default on its loan then you invest in a Credit Default Swap.  The process actually becomes a self-fulfilling prophecy.  The higher the price for a CDS the harder it is to find new investors and the harder it becomes to meet your debt obligations.

CDS can be complicated so for investors who want to keep their investment portfolio simple I have three words for you: diversify, diversify, diversify.

When the world is crumbling at your feet, where are the safe havens? Pimco’s Bill Gross (yep the bond king himself), has said he likes Canadian and German bond markets as well as emerging markets. We also like Canadian and German markets as positive investment opportunities but we think there is an even greater opportunity in emerging markets.

Specifically we will use this column to talk about Brazil. It is becoming a strong country among the emerging markets and there are a lot of ways to capture this market. Brazil is a member of the BRIC nations (the other members are Russia, India and China).

The reason why I wanted to focus on Brazil this week is because I think it is overshadowed by the super giant China. Brazil may not have the growth potential of China, but its prospects are still very impressive. According to the International Monetary Fund’s (IMF) World Economic Outlook, the Brazilian economy is expected to grow by 4.5% this year and 4.1% in 2012.

Compare that to Canada’s expected growth of 2.3% this year and 2.7% next year.

The easiest way to jump into the Brazilian market is investing in the iShares ETF, EWZ. However, this is not for the faint of heart. We had also discussed buying Brazil bonds through ETF’s.

As we can see from the chart the ETF is extremely volatile; however, if volume starts to improve we could get a signal that the price is back on the upswing. There appears to be some resistance at $75 and initial support at $72.

Looking at the three-year chart, we can see that the volatility is actually part of a strong rectangle pattern with support at $70 and resistance at $80. It looks like investors are just waiting for the global economy to pick up before jumping on emerging markets like Brazil again.

iShares ETF, ILF, is showing a similar pattern as EWZ. Again the price appears to be on the upswing but we need volume to pickup to confirm the rally.

Another popular fund that encompasses Brazil is the iShares BRIC ETF BKF. The last major fund is iShares, emerging market ETF EEM.

There are also some popular Brazilian companies traded on the NYSE. The first is Banco Bradesco, NYSE: BBD. Again I like the chart. Volume is starting to pick up and the price is responding positively. A close above $19.75 would be positive signal.

The last stock I like, which is also traded on the NYSE is also the biggest company in Brazil. Petroleo Brasileiro, NYSE: PBR, has a market cap of more than $300 billion. I am not quite ready to jump on PBR just yet. Volume is relatively low and I think we are just starting to see the bottoming process.

As we have pointed out several times before, the U.S. is starting to lose its luster. The U.S. dollar is the reserve currency of the world, but we are already starting to see that other countries are starting to diversify.

U.S. consumers used to be the main driving force of the global economy but with a high unemployment rate, they are scared and are holding on to their money and reviewing their purchases more closely.

According to the IMF, emerging markets will be a major driving force of the global economy. Countries like Brazil, China and India will be major market players in the next few years and now is the time to start looking for positive investment opportunities.

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