Brazil: Do Olympics Make It a Better Investment?

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Includes: CAT, CIG, CPL, EBR, EMIF, UGP, VALE
by: Roger Nusbaum

A reader left a question asking what I thought about the iShares Emerging Markets Infrastructure ETF (NASDAQ:EMIF), a client holding, now that Brazil won the 2016 summer Olympics and early reports say that about half the necessary facilities still need to be built.

CNBC certainly devoted a lot of air time to whether or not the Olympics makes Brazil an even more compelling investment destination than it had previously been.

For a little bit of context I did one Olympic trade for clients in 2003, I bought Hellenic Telecom (OTE) ahead of the Athens games. The idea was similar to what was discussed yesterday about Brazil -- money will be spent and there might be investment demand too. The trade worked out well but certainly was not a home run, and of course it is possible that the stock going up had nothing to do with the Olympics; there is no way to know. I would add that I sold long before the Olympics actually started, February of 2004 if memory serves, which worked out well because shortly thereafter Greek stocks, or maybe just OTE, corrected lower somewhat. Again maybe the Olympics mattered or maybe they didn't.

There was a similar pattern with Chinese stocks in 2008. After a big run up, the stocks started correcting hard quite a few months before the games started, again no idea whether the Olympics were a driving factor or not. I made no attempt to trade the 2008 Olympics.

My exposure to Brazil has been the same for a long time. The core holding has been VALE (NYSE:VALE) for quite a few years, and a couple of folks have a second name. The case for Brazil is very compelling, in my opinion. Its vast resources means it has stuff that the rest of the world needs, and the revenue generated from selling that stuff makes the country richer which bodes well for Brazilian financial assets. It is a very simple thesis.

As far as how EMIF fits into this idea of the Olympics being an investment catalyst, Brazil comprises 22.45% of the fund as of October 1st by my count; the fact sheet is dated June 30 and appears to be very stale. Going by ticker symbols only (you can look the companies up if you want) the Brazilian stocks and their respective weightings as of October 1st were UGP 10.59%, CIG 5.41%, EBR 3.37% and CPL 3.08%. UGP is an oil services company and the others are electric utilities. These stocks would appear to be beneficiaries of any build-out that might occur, but seem unlikely to derive extra benefit from the actual building of new infrastructure.

That does not take away from EMIF in my opinion; the service providers are a very viable way into the theme (obviously I think this, as clients own EMIF) but the builders are more like industrial companies. It might be worthwhile to check out who will be the builders or equipment providers. Clients own Caterpillar (NYSE:CAT) for this reason. To bring up an old point about CAT, it is a beneficiary from, not a proxy for, I think.

For anyone not owning Brazil but thinking about getting in: If reason number one is the 2016 Olympics, I would not be a buyer. If the Olympics are further down the list as almost a nice little extra nugget, then I think you are probably on better footing.