US based investors have enjoyed the last few weeks, but Emerging Market investors have been lighting it up all summer. Bespoke Investment Group posted an interesting chart on their blog on yesterday. The chart shows the relative strength of the the MSCI Emerging Market ETF (EEM) compared to the S&P 500 ETF (SPY). In the chart, a rising line indicates Emerging Markets are outperforming while a falling line indicates under performance.
With concerns over sovereign debt elevated this year, Emerging Markets – which have little of it, should have easily outperformed. However, that wasn’t the case in the first half of the year. Bespoke identified and reported this anomaly in late May. Barron’s reported it the following weekend. That may or may not have been the catalyst to kick-start the move, but since June 1st the EEM is up 16.4% vs. 5.3% for the SPY. On Monday, the EEM broke out.
I have been trading BRIC (Brazil, Russia, India and China) related stocks, a subset of the EEM, for 5 or 6 years. Over the past year or so I have focused primarily on Brazil for a myriad of reasons. However, the awarding of the 2016 Olympics to Brazil confirmed my rationale. The number of jobs created to build the infrastructure to support the Olympics will be unprecedented. Additionally Brazil’s Petrobras, one of the world’s largest integrated oil companies, has discovered literally billions of barrels of oil off the coast in the last two years. The company will soon kick-off a $224B development effort.
The number of well paying jobs created from these projects will elevate millions of people into the middle class. This newfound wealth will find its way into circulation quickly, because Brazilians love to spend. As Illan Goldfajn, chief economist at Brazilian bank Itau Unibanco Holding SA recently stated, “if the world is looking for savers, Brazil is not much good … But if it’s looking for consumers, then we might be able to help.” Companies that supply mobile phones, cars, homes and furnishing will all prosper.
There are several different ways to play Brazil. The most straight forward is thru EWZ the Brazilian ETF. EWZ broke out on Monday as well.
EWZ looks great until you look at it relative to BRF, the Brazilian Small Cap ETF.
BRF is a concentrated play on domestic investment themes such as home building and consumer goods. It broke out in July and is currently making all-time highs. EWZ has under-performed due to structural issues. Petrobras, the largest component of EWZ, has lagged as it negotiated an agreement with the government for the rights to explore and develop the newly discovered oil fields. Shareholders were concerned that the company would have to overpay for the rights. An agreement to pay the government $42.5B was reached last week. This should remove some friction that was inhibiting EWZ.
Gafisa (GFA) a homebuilder, one of the largest components in BRF, is another way to pay Brazil if your preference is individual stocks.
Although my focus has been Brazil, its neighbor Chile (ECH) has been on fire.
Focus or not, I would have bought ECH if it had been on my radar. I am not up to speed on the catalyst in Chile, but according to Jack Dzierwa, co-manager of the Global Emerging Markets Funds, economic stability and increased investment in the domestic sector pushed Chilean markets to all-time highs this summer. He has an excellent video presentation on the ABCs of Latin America – Argentina, Brazil and Chile.
Speaking of Argentina, Jack wasn’t very high on the country, but Mercadolibre (MELI) is based there. Dubbed the “Latin American eBay,” the Buenos Aires company runs the region’s largest online shopping center. It operates its online store in 12 Latin American markets: Argentina, Brazil, Colombia, Costa Rica, Chile, Ecuador, Mexico, Panama, Peru, the Dominican Republic, Uruguay and Venezuela. Brazil generated more than half of its revenue last year. MELI dovetails very nicely into my rising middle class theme.
I spend a great deal of time on Stock Twits – a community of well over 100,000 traders. I believe a certain amount of sentiment can be ascertained by participating regularly. If my instincts are correct Latin American stocks and more broadly Emerging Market stocks are underloved. If that’s true this party is just getting started.