A 35% move for a currency is huge to the point of distorting the economic functioning of the country. It was a very big deal when the dollar dropped to 2.00 reals last May. It is now at 1.70 (meaning the greenback is dropping against the Brazilian currency) in only four months.
This has been a good thing for US based investors, that is the reason why EWZ is up so much more than the actual Bovespa Index. In addition to making trade with the US expensive (for Americans) it also makes trade expensive for the Chinese, remember the yuan is (sort of) pegged to the green back so if the real is up a lot against the the dollar it is also up a lot again the yuan.The decision to impose the tax will either work as they hope or it won't but clearly the action took the markets by surprise. The reasons for the moves up in the currency and the equity market are all still in tact. If you have been involved with emerging markets for any length of time then you know that pullbacks come along of varying magnitudes for varying reasons. The one yesterday may or may not be anything more than the one day, I don't know but I do know it will not be the last time an emerging market gets hit by news the seems out of the blue or goes down for no reason.
Occasionally these things are serious, like with Russia during the bear market, but they do happen. If emerging markets in general all correct then you won't really have anyplace to hide but for the occasional country event the consequence can be mitigated by having a small weighting. For most countries I have had 2-3% weightings and have started to inch that up in a couple of instances (with more to come) to 4-6% which I am quite certain would be my max.
As the subject of country weightings has come up before people ask why so little if I really like a country and stuff like the news from Brazil this week is exactly the reason. One of the risks to investing in certain market segments is events that cannot reasonably be analyzed. The obvious way to mitigate this type of risk is to avoid too much exposure.For long time readers this will be consistent with how I have been managing country exposure for years having written most extensively about Norway and China in addition to Brazil.
The first picture is Joellyn's favorite from in the hoodoos at Bryce Canyon from Sunday. The second picture was taken by our dogsitter while we were out of town. It is Pee Wee playing with one of his miniature tennis balls; amazing photo.
6 comments:
I think this was simply a one day hit to Brazil. Brazil said they would not impose a tax like this like they have done in the past. So the government said one thing and then did another there by catching the market by surprise which cause a little more than half of yesterdays loss. The rest was just a down day in general for markets.
I actually think it was an excellent buying opportunity yesterday, but I am at my limit for Brazil. If you do not like single country risk than this is why vwo or eem are excellent entry etfs.
Volatility is bad in a bear market. Volatility is good in a bull market. You just have to learn to love volatility in bull markets if you do not readily accept it.
Interesting concept. I don't know if I've ever seen a country try to slow down capital inflow like this.
From the little reading I have done it has been tried before to slow down growth. It is not the smartest thing to do IMO.
Direct investment is not taxed and various conduits are created to avoid the fee. So it slows things down at first but the investment community usually counteracts it - surprise
Is it smart for countries to try to limit growth? Is there a good/better way to do it?
For currency exchange rates the Singapore style "basket, band and crawl" seems to work fairly well. Maybe Brazil could take a more direct path to reducing currency volatility. Are there any serious critics of the Singapore paradigm?
I've read things here about the importance of the domestic story in emerging markets; i.e. CHL capturing rising domestic demand for products and services in China.
It is probably the same with investment. The story with the emergence of Brazil's economy is authentic to the extent that Brazilians are investing, and the stocks are responding to reality. What we've seen this year is the Real gain, and is every Brazilian stock up YTD? Every Brazilian stock I've seen has wildly outpaced GDP and earnings.
I call this a bubble, and suggest it is created by unscrupulous American investor inflows. If Brazil didn't slow growth it would be crushed, and it still might. I don't see a difference from the boom-and-bust history in LA/SA, other than the magnitude.
Regardless, those thongs in Rio are first rate.
No need to control those......
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