Beyond Europe: Look To BRIC For Risk And Opportunity

by: Scott Rothbort

While everyone is looking over to Europe, some of the worst damage these last two days occurred in the emerging markets. Take Brazil for example. The Bovespa dropped 5.5% over the last two days. You might think that is not so bad. However, the Brazilian Real also declined dramatically, about 5.1%. Taken together the total loss in US Dollars was about 10.3%. That is evident when looking at the iShares Brazil ETF (NYSEARCA:EWZ) which declined 10.9% over the past two sessions.

Apparently the BRIC nations may be getting a bit hostile toward one another. That is not helping the emerging markets either. Last week Brazil placed a 3000 basis point increase in automobile tariffs. This comes after Brazil jacked up tariffs on steel imports. Presumably, the target was Brazil’s largest trading partner, China. Maybe some side discussion between Brazil and China will take place this weekend at the G-20 meeting to calm down these trade issues.

Arcos Dorados (NYSE:ARCO), the Latin American franchiser of McDonald’s (NYSE:MCD) restaurants took a 16% haircut over the past few days. Just last week ARCO announced an approximate 6 cent per share dividend. I would note that MCD has performed extremely well, declining 3.7% the past few days and rising about 14.5% on a total return basis for 2011 year-to-date. On Friday, Raymond James (NYSE:RJF) initiated MCD and Yum Brands (NYSE:YUM) with Outperform ratings. MCD was given a $95 price target and YUM a $60 price target. One thing we do know about MCD is that the company performs well in challenging economic conditions. My point is that the decline in ARCO is an opportunity to pick up a strong company at a severely discounted price.

Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long ARCO and MCD stock — although positions can change at any time.