As the Eurozone debt crisis erupted in August 2011 and fears of
a 2008 repeat took hold in investor psyches, central banks around
the world began to aggressively reassess current policies. With
several European countries now officially in recession, emerging
economies have taken proactive steps to counter softer export
demand and easing inflationary pressure by lowering interest
[caption id="attachment_59022" align="alignright" width="300"
caption="Brazil: gradually moving from favelas to apartments"]
Brazil's monetary authority, Copom, began a major shift towards
easier monetary policy beginning in August, with the Selic
(official overnight) rate nearing its record low of 8.75%.
It appears there is much more potential easing to come,
particularly if Europe's debt crisis continues to hamper Brazil's
growth and the overall health of the global financial system.
For investors looking to bet on further interest rate cuts,
consider that a lower cost of capital is meant to boost consumer
spending and boost growth domestically. Take a look below at the
price ratio of the Global X Brazil Consumer ETF (
) relative to the iShares Brazil ETF (
(As a reminder, a rising price ratio means the numerator/BRAQ is
outperforming (up more/down less) the denominator/EWZ).
I've annotated the chart to show the huge uptrend and period of
strength that consumer-sensitive Brazilian stocks have had since
mid-January of 2012 relative to the broader EWZ fund.
Much of this I believe is directly attributable to the idea that
lower rates and a more dovish central bank is highly beneficial
towards consumer spending and consumer stocks. The relative
momentum has been stunning and could continue, although any kind of
improvement in Europe which alters policy expectations may result
in a downwards turn in the trend, as other sectors in Brazil
take the leadership role.
For now though, if you believe more Selic rate cuts are coming,
playing the consumer in Brazil seems to be the way to go.
This writing is for informational purposes only and does not
constitute an offer to sell, a solicitation to buy, or a
recommendation regarding any securities transaction, or as an
offer to provide advisory or other services by Pension Partners,
LLC in any jurisdiction in which such offer, solicitation,
purchase or sale would be unlawful under the securities laws of
such jurisdiction. The information contained in this writing
should not be construed as financial or investment advice on any
subject matter. Pension Partners, LLC expressly disclaims all
liability in respect to actions taken based on any or all of the
information on this writing.