Investors in Latin America’s biggest economy need to stop acting like traders and avoid headlines.
This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by David Allen, a portfolio manager at Walnut Creek, California-based Accuvest Global Advisors.
There are plenty of trading ideas for Brazil around the re-election of President Dilma Rousseff, but a serious case can be made to invest in Brazil based on discounted valuation metrics, low risk, and improving fundamentals and momentum.
To cut right to the chase, exposure to companies that make up Latin America’s biggest economy can be achieved in a variety of ETFs, but the Deutsche X-trackers MSCI Brazil Hedged Equity ETF (DBBR | D-51) offers a lower-volatility exposure to the equity markets. I’ll get into the reasons we favor DBBR—a currency-hedged strategy—below; but first, a bit more about Brazil and about Accuvest.
At Accuvest, we deal with a global client base primarily concentrated in Latin America. As such, we regularly have conversations about what the most attractive countries in the region are. The process is simple: Focus on the countries that have the most attractive combination of fundamentals, momentum, risk and valuation.
Or, as we say around here: “bueno, bonito y barato.”
Hype Vs. Valuation
Starting in late 2009, we began hearing all kinds of other reasons to invest in Brazil. They usually sounded something like, “Brazil is getting the World Cup and the Olympics. It should be great for their economy, and I think it makes sense to invest there.”
My sense is that most investors have an idea of the underperformance that ensued for those who made investments based on that headline—even without Wall Street’s disappointment with the re-election of a populist president like Rousseff.
But I’ll wager that most investors don’t fully grasp just how poorly Brazilian equities have performed since the hype of hosting soccer’s 2014 World Cup or the 2016 Summer Olympics.
From the day the Olympic announcement was made on Oct. 2, 2009, until the last day of the World Cup on July 13, 2014, the Brazil MSCI Brazil Index underperformed the MSCI ACWI Index by more than 75 percent.
Sources: MSCI, Bloomberg
When you focus on the data from October 2009, Brazil was one of the least attractive countries in the world. From our perspective, it was ranked near the bottom because it was the third-riskiest country we followed, and the fundamental factors consistently pointed to slow growth.