Donald Rumsfeld was giving President Bush his daily briefing. He concludes by saying: “Yesterday, 3 Brazilian soldiers were killed.”
“OH NO!” the President exclaims. “That’s terrible!”
His staff sits stunned at this display of emotion, nervously watching as the President sits, head in hands.
Finally, the President looks up and asks, “How many is a brazillion?”
According to David Rosenberg at Gluskin Sheff, Brazil may well boast the most attractive fundamentals on the planet on a risk-return basis. Here are his seven reasons why:
• It is just about the only investment grade country where inflation is slowing, the central bank has been easing, and where you can pick up a yield of over 12% for 10-year paper.
• Its most recent change was a credit upgrade last September (Moody’s) and overall the rating agencies are generally favourable over the outlook.
• The inflation rate is 4%, slowing down and at the low end of the range of the past decade.
• The current account is in very small deficit, at just over 1% of GDP.
• The debt ratios are very well contained – 12 % gross external debt and 43% government debt as a share to GDP (the US comparables are 95% and 62% respectively).
• The real is on an appreciating track (+27% in the past year) and that is because Brazil’s terms-of-trade (export price to import price ratio) is flirting near a 12-year high.
• Given that real short-term rates are around 4.5% and the consensus view is 5% real growth this year, there would be little reason to be bearish on the currency outside of a currency setback (and FX reserves at $240 billion are up 15% in the past year and 30% in the past two years.
The biggest risk is if there is a global relapse that drags Asia into the vortex and impair the commodity complex as this would undoubtedly reverse the impressive gains made in the currency — after all, it’s not coffee that is Brazil’s primary export but iron ore; and it is not the USA but China that is the country’s largest customer.
Disclosure: At the time of publication, the author was long iShares MSCI Brazil Index, although positions may change at any time.