Brazil's Stocks Bounce Back After Currency Prices Show Resilience - TheStreet

Brazil's Stocks Bounce Back After Currency Prices Show Resilience

Internet plays may be strong in a country coming back from a currency crisis.
Author:
Publish date:

Ah, Rio! Where Amazon is just a river! Sunny skies, beautiful beaches, the spirit of Carnivale and a chance to rub elbows with the rogue traders who got away!

It wasn't too long ago -- Jan. 13, 1999, in fact -- that a massive devaluation of the Brazilian real (BRL) threatened to snowball into the third leg of the global currency crisis. The logic seemed impeccable: What had started in South Asia in 1997 and spread to Russia in 1998 would end in Latin America in 1999. Unlike South Asia and Russia, however, Brazil mattered by its sheer size: It is the world's eighth-largest economy and a major trading partner of the U.S.

But currency problems and sagging commodity prices obscure unusual strength, and even some value, in the major Brazilian equities that are being driven by the expected growth of the Internet.

It's difficult to consider Brazil in such a light. Its status as a major player in such diverse commodity markets as soybeans (S), sugar (SB), orange juice (JO) and, of course, coffee (KC), led to severe disruption as the cash-strapped country exported everything it could. Just as the previous crises had done, Brazil's troubles led to lower import costs for U.S. consumers, particularly in the volatile food sector.

Community Deflation From Brazil

Source: Bloomberg

The inverted chart of the BRL helps highlight the extent of the currency's catastrophic break following a long period of planned devaluation. The government had operated on the premise that a controlled weakening of the currency would allow for greater certainty in planning for multinationals and locals alike. The chart speaks to the policy's success, and underscores yet again how badly broken the world's currency markets are.

Getting Real: A Crisis Contained

Source: Bloomberg

Internet stocks in emerging markets are not suitable for widows and orphans. Brazil's social contract allows for periods of runaway inflation and financial calamities that affect the masses more than the elites. As a result, it is always too soon to call a permanent turnaround in Latin America's largest economy. A bet is offered to one and all: Come back in a hundred years, and we'll still be calling Brazil an emerging market.

But it is clear Brazil not only managed to fend off a disaster in 1999, it has been a pretty rewarding place to invest ever since. The

Bovespa

, Brazil's stock index, has been on a tear since the late summer of 1999 that would do the

Nasdaq

proud. In dollar-adjusted terms, it is up more than 7% so far in 2000. As they would say in Brazil if they spoke Spanish instead of Portuguese,

que pasa

?

Modest Diversification:
Nasdaq 100 and Bovespa Since Devaluation

Source: Bloomberg

The answer, in one word, is

Telebras

, the Brazilian telecommunications giant. The Bovespa is an index of 44 stocks and has a 7.453% weighting in Telebras common and a whopping 36.546% weighting in Telebras preferred.

Petrobras

, the state oil company, accounts for another 10%.

Telebras is only one of the stocks in the Brazilian Internet surge.

Globo Cabo

, the country's largest cable TV operator, is up over 1,400% in the past year on speculation that its fat pipes will become the Web transmission medium of choice. Other Brazilian telecoms include

Telemig

,

Telemar

,

Tele Centro Sul Participa

and

Embratel

, a unit of

MCI WorldCom

(WCOM)

.

The Internet-related rally in Brazil is more speculative than comparable rallies elsewhere given that these companies still earn far more from voice traffic than from Web traffic: Tele Centro Sul Participa's only got 4.7% of its total revenue from data transmission during 1999.

What, say you, have fundamentals ever done for technology investors? The name of the game in Sao Paulo is the same as in New York, and that is momentum. And, let's not forget portfolio diversification, which may consist of adding a few Brazilian Internet stocks to your portfolio of other Internet stocks.

Sure, you'll have currency risk, but one interesting side effect of the January 1999 devaluation is that a similar earthquake is unlikely for a while. Since the cost of hedging the real is high -- the benchmark interest rate is 19% -- selling it forward to hedge your portfolio is probably more trouble than it is worth.

If we compare the daily returns of the Bovespa in U.S. dollar terms to those of the Nasdaq 100, we find adding Brazilian stocks to your U.S. portfolio will reduce both your risk and return modestly. The correlation is positive and weak (r2 = .173 for you statistics buffs).

The Bovespa is cheap compared to the Nasdaq 100. At the time of this writing, the P/E ratio for the Bovespa is a modest 20.82, with a dividend yield of 3.05%. The comparable figures for the

Nasdaq 100

are 140.97 and 0.03%, respectively.

The decision of which investment is riskier will be left to you.

Howard L. Simons is a professor of finance at the Illinois Institute of Technology, a trading consultant and the author of The Dynamic Option Selection System (John Wiley & Sons, 1999). Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he invites your feedback at

HSimons@aol.com.