Brazilian stocks took a tumble this past Thursday and equities pushed toward their third consecutive loss. The Ibovespa Index (BVSP) fell 1.8%, bringing it to a loss of 14% this month. It is not at its lowest level since October. In addition, Vale S.A. (NYSE: VALE), Petrobas (NYSE: PBR), and Banco Santander Brasil S.A. (NYSE: BSBR) experienced declines. Vale fell by 1.1%, Petrobas fell by 2.2%, and Banco Santander fell by 7%. This was Banco Santander's first loss in five sessions. In addition to stocks declining, the Real pared losses against the U.S. dollar.
There are several different factors at play that worked to bring about these circumstances. Brazil is facing worsening output data from its top export market, China. Also, Brazil's government has been trying to get more involved in their economy. Brazil's central bank has intervened in the foreign exchange market. Intervention efforts are also being put forth in the oil and banking sectors, two very large portions of Brazil's economy. Both Vale and Petrobas directly export to China, which makes China's slowing economy a bit more difficult for them to weather. In addition, government intervention in the oil sector will have a significant impact on Petrobas' business. Banco Santander is one of the largest banks in Brazil, so any outside involvement in the financial or foreign exchange sector will likewise have a significant impact on their business.
These interventions will also have an impact on the Global X Brazil Financials ETF (AMEX: BRAF) and the WisdomTree Dreyfus Brazilian Real ETF (AMEX: BZF), both of which have top holdings in the foreign exchange market and banking sector. One of BRAF's top holdings is the aforementioned Banco Santander. Meanwhile, BZF's main purpose is to track the Brazilian real, which fell in relation to the U.S. dollar on Thursday. These ETFs are an easier and much clearer way to track the movements and reactions of economies and sectors, rather than individual companies.
Since Vale and Petrobas export a large portion of their products to China, they are correlated to China's economy. As China's economy recovers, so shall Vale and Petrobas. And China will recover. They are a large economy and experience their share of low times. However, they have the drive and the resources to pull through with a strong recovery. The intervention efforts, however, might take some time to adjust to, but Petrobas, Banco Santander, and the Real will adjust. Either that or the government will realize they should keep their hands away. Brazil has a lot to prove to the world right now as they prepare to host the Olympic Games. The economy is trying to expand so fast right now, but Brazil will adjust. Just like China, Brazil has vast resources. BRAF and BZF will only benefit from the upward trend.
The individual investor might notice some short-term losses here, but these minor setbacks will have little to no effect on Brazil's long-term potential. Brazil has more than enough monetary and fiscal stimuli to push their economy upward in the second half of the year. Take this down time to invest in Brazil. BRAF and BZF will provide lower risk for the conscious investor. However, Vale, Petrobas, and Banco Santander are all great companies with long-term growth potential. Brazil may be down right now, but their economy will continue to grow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.