Global Value Investing

[ratobranco]

BDORY.PK and PBR - I'm watching them closely, but Brazil hasn't been working, and I don't think it's going to start working any time soon.

What makes me hesitate is this:

Brazil is going to be affected by the China slowdown, and a potential end to the construction commodity supercycle. The Brazilian economy is clearly slowing right now, and that means rate cuts, which are in progress.

The rate cuts are a problem for US investors b/c they bring down the value of the real, which is heavily overvalued right now versus the dollar on a strict PPP basis.

Using the Big Mac Index, for example, fair value on USDBRL is about 2.44, versus the 1.92 that we see today. I see more downside as rates continue to fall. Longer term, as the Brazilian economy becomes more efficient, inflation will ease, which will put further downward pressure on rates.

http://www.economist.com/node/21542808

What I think many of us fail to realize is that most of the gains from these non-China emerging market plays come from currency gains. Case in pt: ^BVSP is down 5% yoy, but $EWZ, the Brazil ETF in dollar terms, is down 20%. That's because USDBRL is up 20%.

So ideally what I'm waiting for is for the end of the rate cycle, USDBRL to peak out as close to PPP fair value as possible. The lower these names go in that process, the better.

Alternatively, you can try to take out the BRL exposure by shorting the currency, but that costs you the interest rate, which is hardly negligible. Implied rates on BZF, for example, are 7%.

Any good shorts in Brazil to pair against a long BDORY.PK position? I think VALE is going into the teens here. Construction supercycle over, no reason for iron ore not to continue falling.