By Amine Bouchentouf
While the Latin American country struggles with a slowdown now, it will be a leading indicator for the next commodity bull run.
I've written in the past that if there were one country I would choose that represents the commodities markets in one single punch, it would be Brazil. This Latin American country is blessed with large petroleum reserves, abundant mineral wealth and a land mass that makes it the agricultural powerhouse of the world.
It's often said that wherever Brazil goes, commodities will soon follow. If there's one country that's totally aligned with the performance of commodities as a whole, then it must be Brazil. Brazil has large oil reserves that are growing on a daily basis. Thanks to deep water drilling technology, Brazil discovered large offshore oil reserves called "pre-salt" that, if extracted, could rival Saudi Arabia's reserves. Petrobras (PBR) is in charge of exploiting these prolific reserves.
In addition to prolific energy reserves, this Latin American country is also home to some of the largest mineral reserves in the world. Through Vale (VALE), the publicly traded mining giant, Brazil is one of the top producers and exporters of iron ore globally. Its iron ore reaches countries as far away as China, and it has diversified its production and manufacturing to countries such as Oman in order to better reach its global customer base.
And let's not forget about agriculture: There's probably no country in the world that rivals Brazil as an agricultural powerhouse. It's the top producer and exporter in many of the key agricultural commodities such as coffee, orange juice, sugar, sugar cane, chicken and even beef. As a result, wherever Brazil goes, commodities tend to follow.
2013: A Tough Year
However, 2013 will be remembered as one of the toughest years for both Brazil and commodities in the last five years. Brazil hasn't suffered such a deep correction since 2008, when its stock market collapsed, dropping more than 45 percent during this period. In addition, the country's currency has weakened dramatically in face of the dollar and other major currencies. Finally, internal inflation (as a result of logistical inefficiencies) has continued creeping up, leaving the economy in a quicksand situation.
The difficulties that Brazil has experienced over the last year mirror the weaknesses seen in the commodities markets across the board. When Brazil begins to pick up, it will be an additional positive indicator for commodities. Of course, the name of the game is selectivity-you have to be able to select which commodities will outperform over the long course.
I believe agricultural and energy commodities will be the first to lead the rally once the bull market comes back. And don't doubt that the bull market will come back. We're already seeing positive signs in a select number of commodities such as natural gas. As I've been saying over the last decade that commodities are a cyclical business, and investors who do well are able to pick and choose their entry/exit points wisely. And the way to do that is to keep a close eye on key indicators such as Brazil.
My expectation is that commodities are going to have a rough few weeks ahead. There's too much volatility in the financial markets right now, and the Federal Reserve has not provided any meaningful clarity on its upcoming policies. This lack of clarity will continue creating volatility in the markets. For long-term investors, my recommendation is to stay on the sidelines until there's a strong upward pattern established before jumping back in with long positions. For short-term traders, this is a great market, because you can capitalize on the volatility.
Over the long term, my expectation is that commodities will resume their upward trend. And it's important for every investor and trader to monitor as many indicators as possible. And one of these major indicators is Brazil. Use this lagging indicator as a powerful tool in your investment arsenal.
Disclosure: The author doesn't have any positions in the stocks mentioned.