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A combination of policy moves and a slowing economy have weakened the Brazilian real by 4.8% since the beginning of March, making it the worst performing currency tracked by Bloomberg. For exporters, this is a welcome change from the 8.7% appreciation in the first two months of the year, consequently making it the best-performing currency.
An overly strong local currency has been a structural problem for Brazil — except, of course, when the real has been too weak for the government’s comfort. It looks like the situation is getting ready to reverse again.
Bloomberg prints a fairly negative case for many investors in the emerging markets highlighting the risks to investment in state-controlled companies across the BRIC nations. All global investors should at least be aware of the issues at stake.
All four of the BRIC nations report manufacturing purchasing manager indexes (PMI) on Thursday. The monthly report is an interview-based survey of managers within the sector and can be a strong leading indicator for countries where manufacturing and exports are a large part of the economy.
Vermilion’s analysts believe Brazil continues to emerge as the short-term global leader in Latin America and that there are plenty of individual opportunities there.
Currency movements play a large part of emerging market investment. As the sovereign currency rises or falls against the currencies of suppliers and buyers, margins and competitiveness can swing dramatically.
Banco Fator says the steel industry in Brazil and worldwide will have a slow recovery in 2012, affected by the crisis in Europe and deceleration of China’s economy. For this reason, they do not recommend the sector in the short and medium term.
Brazilian central bankers surprised few investors by raising the local benchmark interest rate, but stocks are rallying on news that inflation risks have diminished significantly.
The COPOM raised the SELIC rate only 50 basis points to 10.75%, moderating from the 75 basis-point hike that recent policy decisions had led investors to expect.
Watch for the minutes from the meeting to be published next week for details on Brazil’s economy. For now, the good news is that COPOM says inflationary risks have retreated thanks to a combination of domestic and external factors — in other words, thanks to rumblings about a slowdown in Europe, China or the United States.
All major Brazilian ADRs are celebrating the news. EWZ (quote), a broad gauge of the Brazilian market’s performance, is up about 3%:
The small-cap BRF (quote), which should be more economically sensitive than its large-cap counterpart, edged up a surprisingly restrained 2.4% — perhaps because it is less well known as a way to play Brazil macro developments.
As a result of the move, the big banks have cut their forecasts on Brazilian interest rates. Because a high relative interest rate translates into a stronger local currency, this should weigh on the real and real-oriented portfolios like BZF (quote) going forward:
It should also help keep Brazilian manufacturers and commodity producers from becoming too uncompetitive due to an overly strong local currency. As it is, the rising real has bitten into the country’s steel industry by encouraging foreign competitors to undercut domestic rivals.
Local steel giants Gerdau (GGB, (quote) and Siderurgica (SID, (quote) are both up nearly 5% today:
On the other hand, a strong real encourages Brazilian consumers to buy more foreign products and to travel abroad. Airlines TAM (quote) and GOL (quote) are leading the local market, both up around 5%:
And the newly launched Brazil consumer ETF BRAQ (quote) is up 2.6%:
European steel makers are reporting bullish news today and there is a great chance that the good feelings will spread to other regional players in the battered steel space.
One of the biggest Russian names, MMK Steel (no ADR), says that while pricing on key products fell 10% to 20% over the second quarter, its average sales price still rose 17%. No further price cuts are planned, and the company is even boosting output ahead of what it expects will be a strong third quarter.
Traders are also betting that German rival ThyssenKrupp (no ADR) will raise output and full-year earnings guidance.
Thyssen does a lot of business in Brazil, so this is theoretically a good thing for Brazilian steel mills as well as their European and global counterparts.
SID and GGB are your Brazilian names to watch here.
On the global side, while it is hard for U.S. investors to trade either Thyssen or MMK, MT, X and MTL are viable proxies if this turns into a groupwide swing.
