Seeking Alpha
Mutual fund manager, CFA, registered investment advisor, macro
Profile| Send Message|
( followers)  

Summary

  • Political change can be more stimulative than all the Quantitative Easing in the world.
  • Recent polls show that Brazilian President Dilma Rousseff has been waning in popularity, resulting in the very real possibility that she does not get re-elected.
  • Given how much Brazil has underperformed under her administration, it stands to reason a major change in the government could alter investor expectations.

"If there is no struggle, there is no progress." - Frederick Douglass

Political change can be more stimulative than all the Quantitative Easing in the world. While central banks can attempt to control the flow of money, longer-term investments ultimately benefit most from structural regime changes, which those in government have the power to enact. Narenda Modi's landmark win in India is proof of this, with India's stocks, as represented by the Sensex Index, surging thus far in 2014 as the new administration allows for more market friendly policies to dominate the country.

I suspect Brazil is about to have its own Modi moment. Recent polls show that Brazilian President Dilma Rousseff has been waning in popularity, resulting in the very real possibility that she does not get re-elected. Dilma has been controversial to many given non-market friendly policies, on-going frustration over inflation, and spending policies that focused on the World Cup rather than badly needed infrastructure for citizens.

Given how much Brazil has underperformed under her administration, it stands to reason a major change in the government could alter investor expectations. Take a look below at the price ratio of the iShares Brazil ETF (NYSEARCA:EWZ) relative to the S&P 500 SPDRS ETF (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/EWZ is outperforming (up more/down less) the denominator/SPY, overlayed with the ratio's 20-day moving average (MA). Note that the ratio appears to be in the early stages of potentially breaking out of its relative ratio range.

(click to enlarge)(click to enlarge)

The biggest Energy holding in Brazil is Petrobras (NYSE:PBR). It's worth focusing on the price behavior that largely because the state-run company has lost substantial market-cap because of limits on fuel prices forced by Rosseff. The Energy sector overall looks particularly interesting, and is currently our biggest overweight in our equity sector rotation ATAC Beta Rotation Fund (Ticker: BROTX). Take a look at Petrobras and its recent stock price behavior.

(click to enlarge)(click to enlarge)

With so much overall underperformance and potential regime change, Brazil may end up being the star performer among the BRICS (Brazil, Russia, India, China, South Africa) in the coming years under a new president. While they may have lost the World Cup, investors may be on the verge of winning something much bigger - a long awaited melt-up to come.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The fund as of 07/25/14 does not invest in any of the following investments: SPY, EWZ, or PBR. Fund holdings are subject to change and are not recommendations to buy or sell any security. Current and future holdings are subject to risk.

The Fund's investment objectives, risks, charges, expenses and other information are described in the statutory prospectus, which must be read and considered carefully before investing. You may download the statutory or summary prospectus or obtain a hard copy by calling 855-ATACFUND or visiting atacfund.com. Please read the Prospectuses carefully before you invest.

Mutual fund investing involves risk. Principal loss is possible. Because the Funds invest primarily in ETFs, they may invest a greater percentage of its assets in the securities of a single issuer and therefore is considered non-diversified. If a Fund invests a greater percentage of its assets in the securities of a single issuer, its value may decline to a greater degree than if the fund held were a more diversified mutual fund. The Funds are expected to have a high portfolio turnover ratio which has the potential to result in the realization by the Fund and distribution to shareholders of a greater amount of capital gains. This means that investors will be likely to have a higher tax liability. Because the Funds invest in Underlying ETFs an investor will indirectly bear the principal risks of the Underlying ETFs, including but not limited to, risks associated with investments in ETFs, large and smaller companies, real estate investment trusts, foreign securities, non-diversification, high yield bonds, fixed income investments, derivatives, leverage, short sales and commodities. The Fund will bear its share of the fees and expenses of the underlying funds. Shareholders will pay higher expenses than would be the case if making direct investments in the underlying funds. The Beta Rotation Fund is new with no operating history and there can be no assurances that the fund will grow or maintain an economically viable size.

All investing involves risks. Investing in emerging markets has more risk such as increased volatility, relatively unstable governments; social and legal systems that do not protect shareholders, economies based on only a few industries and securities markets that are substantially smaller, less liquid and more volatile with less government oversight than more developed countries. Investing in small cap companies involve additional risks such as limited liquidity and greater volatility than large companies.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

The S&P 500, or the Standard & Poor's 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

The Sensex is composed of 30 of the largest and most actively-traded stocks on the Bombay Stock Exchange.

References to other securities should not to be interpreted as an offer of these securities.

ATAC Beta Rotation Fund is distributed by Quasar Distributors, LLC. No other products mentioned are distributed by Quasar Distributors, LLC.

Source: Brazil's Coming Melt-Up