Brazil Chokes Off Foreign Investment

After the close on Monday, there was a shock to the Brazilian markets as an announcement was made that Brazil will be slowing foreign investment into the country. In as effort to cool the hot currency and speculation within the stock markets, they are reinstating policy from a few years ago.

Brazil has been one of the countries that has been concerned about the U.S. dollar’s status as the world’s reserve currency. Obviously this is of importance as their country has both oil and commodities as a core export. With the U.S. dollar under fire (due to the systematic devaluation through debt monetization by the Fed) many countries are worried about a long, healthy and sustainable global recovery when relying on the U.S. dollar as the backbone currency.

On the news, Brazil’s equity markets and futures dropped sharply overnight (EWZ).

Brazil is especially sensitive as the 35% appreciation of their currency in 2009 that threatens to stall exports. The announcement surprised investors as did the notification that the tax will begin on Tuesday. Therefore there is no time to transition. Beginning tomorrow the new taxation rules will begin. The hope is that this will calm the rise of the Real and stop excessive market speculation in both the currency and equity markets.

Brazilian Real ETF - Real vs. U.S dollar

From Bloomberg:

Oct. 19 (Bloomberg) — Brazil will impose taxes on purchases by foreign investors of real-denominated, fixed-income securities and on purchases of stocks, Finance Minister Guido Mantega said.

The measures are being taken “to avoid an excess speculation in the stock market and in capital markets,” Mantega told reporters in Sao Paulo.

The real has gained 35 percent since the beginning of the year, the best performer amid the 16 most traded currencies tracked by Bloomberg. The currency has gained 5.3 percent in the past month.

The central bank started purchasing dollars on May 8 in a bid to temper the real gains. The currency weakened 0.5 percent to 1.7177 per U.S. dollar at 4:28 p.m. New York time.

Earlier today, the Brazilian real was cut to “underweight” from “overweight” in RBC Capital Markets’ model portfolio on concern the government would impose new taxes.

Today’s announcement reverses last year’s decision to end such taxes. In October 2008, President Luiz Inacio Lula da Silva eliminated a tax, known locally as IOF, of 1.5 percent on foreign investments in certain financial products and of 0.38 percent on foreign-currency loans.

“Excess global liquidity could lead to an over-appreciation of the real,” Mantega said. That would threaten to hurt the country’s exporters and further fuel demand for imports.

Disclosure: Horowitz & Company clients may hold positions of securities mentioned as of the date published

Comments

[PhreddyPhert:]

WTF*** Sun of a Beach!!!!!!!!!!!!!

Oct 20 11:22 AM

[Reconsidering:]

That's what still make "dangerous" to invest in emerging markets. These guys wake up one morning and change the rules of the game.

Oct 20 12:13 PM

[surfgeezer:]

Ha glad I got in early and increased my CPL position early yesterday. Yes we will see a slight draw down, but the fundamentals will be the same. The country is imposing a tax on foreign investors to protect it's exporters. WOW what a concept. Its like maybe they learned a few things about balanced budgets and hot money with their problems before 2000. Can you imagine the Republican/wallstreet outrage if such a thing was suggested for US. Personally I will buy more on the dips

Oct 20 12:44 PM

[sacking:]

I apprecaite the news, and would appreciate any suggestions you may have as to how to move forward with my investments in EWZ and BRF. I would prefer not to sell as I think Brazil is going to be a leading economy in the years to come. Buy on dips or just hold on?

Oct 20 02:05 PM

[genghis khan:]

I'm with surfgeezer.. I will be looking to buy another thousand shares starting tomorrow AM.

Why would you run from a little 2% tax when this investment will still return 30%, 40% 50% or higher?! Lotsa Chicken Littles out there.

Oct 20 06:45 PM

[John Hansen:]

Me too! I think surfgeezer and genghis khan are looking at this in the right way. I'll hold on to my EWZ and add to my position on Dips. It has got to be a safer investment than most US equities.

Oct 21 01:09 AM

[Alan Young:]

Brazil investment is now better than ever. A 2% load is just enough to stop traders from running in and out of the market for a quick buck; long-term investors have more incentive than ever to stay in. I'm actually surprised that the market dropped on this news, but it certainly won't bother me.

Oct 21 09:18 AM

[Homer II:]

I wouldn't leave Brazil's markets just because a transaction tax has been imposed. It is one of those rare boom markets where you will always be handsomly rewarded for patience.

Oct 21 10:36 AM

[ArtfulDodger:]

Long VALE & SBS and staying that way.

Who runs Wall St., Surf? Have you looked at the donations from the big NY Houses? About 2-1 goes to the Devilrats!

Oct 21 12:49 PM

[Satisfied:]

EWZ lost $2.91 yesterday 10/20.
EWZ is up $2.54 as of 1:46 today.

Those who hit the panic button and sold yesterday are looking rather foolish today.

ho hum

Oct 21 01:48 PM

[jambo:]

YUP, keepers, EWZ and BRF. bought more this morning, thanks for the $2.00 price break! That bottle of 2001 Dom is looking nice for tonight!

Oct 21 07:20 PM

[maryanne:]

one week later, EWZ is still falling, now $71.82 (about $5 off from last week highs) Hope all those Chicken Littles back off!!!

Oct 27 05:39 PM