Brazil: Do Olympics Make It a Better Investment?

A reader left a question asking what I thought about the iShares Emerging Markets Infrastructure ETF (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 (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 (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.

Comments

[waf76:]

Best investment in Brazil is PBR.

Oct 03 01:28 PM

[Roger Nusbaum:]

any opinions about the chatter from a few weeks by Lula about the possibility of nationalizing some of the production assets?


On Oct 03 01:28 PM waf76 wrote:

> Best investment in Brazil is PBR.

Oct 03 03:15 PM

[dieuwer:]

By selling 1-3 years before the Olympic Games you can pocket a fat gain:

LA Games: 1932. Crash in progress 1929-1932.
Berlin Games: 1936. War in 1937.
LA Games: 1984. Crash 1987.
Seoul Games: 1988. Seoul Composite Crash 1989.
Atlanta Games: 1996. NASDAQ crash 1999.
China Games: 2008. Crash late 2008.

Oct 03 06:43 PM

[Alan Young:]

"For anyone not owning Brazil but thinking about getting in"-- never mind the reason; just do it. It's crazy to be an investor of any kind with no exposure to Brazil; it's one of the strongest-performing economies on the planet.

Oct 04 03:28 AM

[Mad Hedge F...:]

xfy Hoping to beat the rush, I ordered my Rosetta Stone Portuguese language program last week, fully expecting Rio de Janeiro to win the 2016 Olympics bid. Pick pockets of the favellas of Latin America’s largest city were ebullient. A cheer even went up on the floor of Chicago’s CME, now that the denizens of the Windy City are dodging a monster tax bill. Of course, Obama was in a no win situation, with mud on his face for his failed pitch, and blamed for defeat if he didn’t go. There was never any doubt that the home of the string bikini and the banana thong was going to win. In order to justify the gargantuan cost of the modern games, the International Olympic Committee long ago turned this into an emerging market development program. The great news for investors is that corresponding emerging stock markets have a history of tenfold returns going into the games. Look at South Korea and China. Only the 2004 Athens games were a bust, the home of the Olympics building a games that were far more than it could afford. I have long been a fan of the country that is doing everything right, with a perfect demographic pyramid and a liberal pro business government fueled by resource and energy exports. I managed to catch a 270% leap for my subscribers in the ETF (EWZ) this year. I wouldn’t’ rush out tomorrow and buy on the news, as an impending global stock market selloff is likely to pull it down with everything else. But it definitely should be at the top of your “buy on dips” list.

Oct 04 05:28 AM

[elliot_mllr:]

How about the Brazilian Real Fund (BZF)? It was a buy before the announcement and certainly afterward as well.

Oct 04 09:44 AM

[Jan Paul:]

I think the more telling thing is that the world is turning its back on the U.S. in many ways, not just this where we were eliminated even before other developed nations.

The moves by nations (Brazil is one) away from the dollar and the IMF now doing loans in SDR's is just more of the same. You don't hear about a global recovery when the U.S........ but rather, when the emerging markets.......

One has to wonder if they think things will be so bad here by 2016 (about when Marc Faber projects we have real problems) that we are more risky than a city with a high crime rate, now.

Oct 04 10:16 AM

[Richard Edw...:]

Rio de Janeiro is not the largest city in South America. São Paulo is and Buenos Aires also has more people.

A lot can happen here politically betwen now and the World Cuip in 2014 not to mention 2016 the year of the Olympics.

Banks such at Itáu always make money.

Richard E. Hayes
Sousas, SP, Brazil

[e-mail]


On Oct 04 05:28 AM Mad Hedge Fund Trader wrote:

> xfy Hoping to beat the rush, I ordered my Rosetta Stone Portuguese
> language program last week, fully expecting Rio de Janeiro to win
> the 2016 Olympics bid. Pick pockets of the favellas of Latin America’s
> largest city were ebullient. A cheer even went up on the floor of
> Chicago’s CME, now that the denizens of the Windy City are dodging
> a monster tax bill. Of course, Obama was in a no win situation, with
> mud on his face for his failed pitch, and blamed for defeat if he
> didn’t go. There was never any doubt that the home of the string
> bikini and the banana thong was going to win. In order to justify
> the gargantuan cost of the modern games, the International Olympic
> Committee long ago turned this into an emerging market development
> program. The great news for investors is that corresponding emerging
> stock markets have a history of tenfold returns going into the games.
> Look at South Korea and China. Only the 2004 Athens games were a
> bust, the home of the Olympics building a games that were far more
> than it could afford. I have long been a fan of the country that
> is doing everything right, with a perfect demographic pyramid and
> a liberal pro business government fueled by resource and energy exports.
> I managed to catch a 270% leap for my subscribers in the ETF (seekingalpha.com/symbo...)
> this year. I wouldn’t’ rush out tomorrow and buy on the news, as
> an impending global stock market selloff is likely to pull it down
> with everything else. But it definitely should be at the top of your
> “buy on dips” list.

Oct 04 10:39 AM

[Richard Edw...:]

Former banker who has lived in Brazil since 1964. Open for consulting work.

Oct 04 10:46 AM

[sacking:]

I've bought ILF, EWZ and BRF over the past year and I'm up nicely on them. I expect them to continue to outperform the market. Only problem is they outperform down as well as up. While ILF and EWZ are both resource heavy, BRF is Brazil small-cap stocks and should really do well once the market straightens out. Go Brazil.

Oct 04 11:00 AM

[maclogo:]

The writer didn't mention PBR when talking about investments from Brazil? Very strange.

Oct 04 11:25 AM

[Stephen Kanitz:]

Othon Hotels rose 70% today on announcement. With Chicagoans protesting on the street, Tokyo and Spain in the dumps, I am amazed no one bought the leading hotel chain in Rio.
Betting on Brazil. brazil.melhores.com.br

Oct 04 12:12 PM

[Sugar Charlie:]

Everyone betting on one hare or another, and no-one on a tortoise? Always mining or oil or banks or infrastructure? How about a long-term holding in Brasil Foods S.A. (NYSE: PDA), formerly Perdigao S.A., now recovering from its rescue of its merger-partner Sadia S.A. whose FX bets brought it to ruin. A dominant food conglomerate in Brazil and a major exporter. Find good third-world exposure in top-flight food producers, especially if not purely commodity-names. And not only in Brazil. -- Obviously it's a cliché that consumer staples are "defensives". But I say, give the finger to timing and sector-rotation. (And before you decide that buy-and-hold is dead, consult Warren Buffett. The issue is WHAT you buy and hold.) Less cyclical sectors like consumer-staples provide ballast to a portfolio on an ongoing basis (not just when you feel in a defensive mood) and allow you to hold a relatively higher proportion of your portfolio in equities than would usually be considered appropriate, and to do so with reasonable safety, especially if you are well diversified. Find gold in chicken, corn-flakes abd scotch.

Oct 04 02:06 PM

[dmz50:]

NETC check it out, not many people know about this gem.

Oct 04 02:27 PM

[Mrudula Shah:]

South America, unlike Africa, is rich in its water resources and land fertilty, i.e., agriculturally rich. And, now it's known to be rich in hydrocarbon reserves. Unlike Africa, Indians did not settle in this region for nothing!! Though not well-educated through conventional schooling, Brazil's Lula is a very smart politicain with a vision for his country. China and India both, and also Japan, have been developing closer ties with Brazil. It's obviously the most stable South American country despite reportedly rampant pick-pocketing in Rio. It's a huge country which can not be defined by what is going on in just Rio. Note that its Embraer company is well-known for manufacturing and exporting sophisticated jet planes. Japan, China or India, despite their technological gains, have not been yet capable of doing so!! This country is bound to prosper in the coming decades, whether the stereo-types who abhor anything South American or Latin like it or not. My view is that the Olympics will give it much more visibility and world-wide recognition. Lula surely will not miss the opportunity to capitalize (he has 7 years to get prepared for the olympics - a long enough time). Thus, I do not think that one who wisely continue to invest in post-olympic Brazil is going to have to regret because the statistics cited above for the post-olympic situation will be invalid in case of Brazil.

Oct 04 05:57 PM

[tripleblack:]

I like this article. I think that the author has it right, that the Olympics will be a tough pure play - that the beneficiaries will be large entities such as those which comprise EMIF - and that the Olympics will not be a strong enough influence to sustain any spot-increases long term.

The idea of viewing the Olympics as a bonus for a decision made otherwise rather than a motive to invest looks like sound advice to me.

Oct 04 08:55 PM

[jarco:]

Is EWZ the best vehicle?


On Oct 04 08:55 PM tripleblack wrote:

The idea of viewing the Olympics as a bonus for a decision made otherwise rather than a motive to invest looks like sound advice to me.

Oct 04 09:31 PM

[Pastano:]

I am short EWZ 69 puts

Oct 05 06:39 AM

[tripleblack:]

BRF would be more of a pure "Olympics" play, assuming that were possible, which I do not believe.

Here is a good current article about BRF:

www.thestreet.com/_yah...

Note that it is up 38% as of Oct 1, whereas EWZ is up about 23%. EWZ is more concentrated among large companies, whereas BRF is focused on small-mid cap for more of their investments.


On Oct 04 09:31 PM jarco wrote:

> Is EWZ the best vehicle?
>
> The idea of viewing the Olympics as a bonus for a decision made otherwise
> rather than a motive to invest looks like sound advice to me.

Oct 05 09:10 AM

[Marli:]

At what price? Would you call the Bovespa Index cheap at these levels?
Don't get me wrong. I'm long term bullish on the Brazilian economy, but as far as asset prices are concerned, finding the right entry point is almost as important as the selection of the security itself.


On Oct 04 03:28 AM Alan Young wrote:

> "For anyone not owning Brazil but thinking about getting in"-- never
> mind the reason; just do it. It's crazy to be an investor of any
> kind with no exposure to Brazil; it's one of the strongest-performing
> economies on the planet.

Oct 05 02:32 PM

[Marli:]

...and as far as the whole 'Olympics' thing is concerned, from a valuations perspective, it's a historical outlier with no clear impact on net debt free cash flows. Although hosting the Olympics would be a boon to certain businesses and would in all likelihood be accompanied by matching government investment (painting the favelas in bright colors, hiding the desperate poverty of the permanent underclass) it would be the equivalent of a one-time fiscal injection. Unless you can make the case that hosting the Olympics would result in a longer term increase in either foreign direct investment, local production or international exports, then in a sense the hosting of the Olympics is a 'lagging' confirmation of their rise to prominence thus far.

Oct 05 02:47 PM

[Joseph Sherman:]

Roger Nusbaum asks "Do Olympics Make It a Better Investment?" I think the investment brought into a city by the Olympics is like an economic espresso. Specific forms of infrastructure will grow, Tourism spending will spike and the country will be on show to the world. But, what are the long term implications for the economy. Consider the effects on Athens and Beijing.

Oct 05 06:02 PM

[waf76:]

Still murky as to the extent of when and how much production will nationalized to support the country's social programs. Like most gov't run operations, i think it will be later rather than sooner.


On Oct 03 03:15 PM Roger Nusbaum wrote:

> any opinions about the chatter from a few weeks by Lula about the
> possibility of nationalizing some of the production assets?

Oct 05 07:58 PM