Brazil currency slide to hit stocks

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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 the real"] Image Courtesy Benjamin Thompson: [/caption]

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% next year.

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 dollars.

Shares of exporters and manufacturers should benefit relative to other companies. Shares of steel producer Gerdau ( GGB , quote ) 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 ( EWZ , quote ) 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , International , Stocks

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As of 4/23/2014, 02:53 PM