I fully understand the political and economic situation that Brazil finds itself in. However, one really needs to examine the causes. The run away inflation largely corresponds to weakening of the currency (and to a lesser extent the drought) and not more typical causes (i.e., an economy overheating). These types of currency turmoils are often self correcting. I look at is as a hedge against the dollar experiencing an abrupt weakening. Because Brazil has an economy largely driven by commodities which are mostly priced on the world market in dollars, its currency tends to strengthen as the dollar weakens. During the last several worldwide recessions, Brazil has been one of the 1st out and has shown higher growth rates than the developed world. So I look at bottom fishing in water stocks there as a way of hedging the ongoing currency turmoil throughout the globe.
I'd worry more if the State of Sao Paulo was nationalizing or using heavy heanded policies instead of market approaches to dealing with the drought. They have approved extraordinary Tariff or price increases to recognize that water is now an increasingly more valuable commodity and users will have to pay up for it. The company is using this money for water diversion projects which will help meet the needs of this huge metropolis (project to add 5 m3/s will be completed in 2017). People that conserve water are getting a bill reduction or "bonus". This clearly seems to be a very market focused approach. Can we say the same thing about all the policies in the US? I distinctly recall winners and losers being picked by the government during the 2008 financial crises. Dilma's 8% popularity and the backlash against corruption could turn out to be a positive.
Nibbling in the face of a 75% reduction (in US dollars, much less in local currency) is definately early, but we are entering a world where currency minipulation results in changes that occur much quicker than any other period in my lifetime.
Regards FL
