The Brazilian real dropped to a three-year low last week as
President Rousseff and other officials stepped up their
public campaign to keep the currency weak
. President Rousseff pronounced the currency as, "overvalued," just
a weeks after Central Bank President Tombini promised low rates for
a, "prolonged time."
[caption id="attachment_69655" align="alignleft" width="300"
caption="Investors must be aware of what effect currencies can have
on stock prices, especially lately for stocks that have exposure to
Fears of further intervention sent the real down almost a
percent to BRL 2.0985 against the dollar. The local currency now
buys less than two-thirds what it did last year when it reached a
multi-year high of BRL 1.54 per dollar.
The government is not completely without cause to reignite its,
"currency war." The United States, Europe and Japan have all
enacted historic monetary programs that many think will ultimately
debase their currencies. This could be troubling for Latin
America's largest economy. Imports would increase as less expensive
products hit the market and take share from local producers.
Exports, accounting for 14% of GDP, would become less competitive
against cheaper products in foreign markets.
The Central Bank has already lowered the benchmark SELIC rate to
an historic low of 7.25% though the economy has yet to respond to
cheap money and government stimulus programs. GDP is expected to
increase just 1.5% this year before rebounding marginally to 3.5%
While a weaker currency may help to support exports, investors
may want to keep an eye on inflation data. A weaker real risks
higher inflation as imports become more expensive and as producers
raise prices to keep their earnings stable on an adjusted basis.
Investors may also need to reevaluate the ability of corporations
to repay their dollar denominated debt.
Investors will see a weaker real in underperformance of ADR
shares as local assets are worth less when converted to
Shares of exporters and manufacturers should benefit relative to
other companies. Shares of steel producer Gerdau (
) may do well exporting to the United States and throughout Latin
America. The shares pay a 2.1% dividend yield and have outperformed
the iShares MSCI Brazil (
) by more than 20% over the last year.
Ultimately, I do not have much faith that the government will be
able to direct its economy with its recent series of programs and
policies. Increased public spending leading up to the 2014 World
Cup and the 2016 Summer Olympics may be able to push economic data
up but structural problems and an uncompetitive manufacturing
industry will persist.