Time to sell out of Brazil's equity rally, strategist says

Brazil’s equity market has soared since mid-March, when the buzz first began that Pres. Rousseff might lose in the October elections; the iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ) has jumped ~30% since then and has gained 16% YTD.

Part of the rally is propelled by optimism that the state-owned sector, including Petrobras (NYSE:PBR) and Electrobras (NYSE:EBR) will operate better with a new, more pro-business government; iron ore producer Vale (NYSE:VALE), whose fate is tied to China, is the only high-profile underperformer, not even breaking even this year.

But strategist Geoff Dennis is skeptical of the Brazilian rally, and thinks it's time to sell; the new government is not likely to have a big mandate, the election is too close to call at present, and Brazil is no longer cheap, trading at 11.2x forward earnings a 33% premium to its recent average of 8.5x.

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Comments (16)
  • leopardtrader
    , contributor
    Comments (3836) | Send Message
    Typical "skittishness". Amateurism at play yet never cared that this was on the down since 2011. What makes money in the market is in the sitting. Those that can be both right and sit tight are uncommon.
    29 Jul 2014, 11:23 AM Reply Like
  • ventmizer
    , contributor
    Comments (9) | Send Message
    were you a buyer below 13 not that long ago?
    29 Jul 2014, 12:57 PM Reply Like
  • Tda
    , contributor
    Comments (125) | Send Message
    Vale is a bargain with fresh deals locked in for iron ore and high-quality iron pellets for China's vast infrastructure development and improvement plan. If those other stocks are a sell, Vale is a buy.
    29 Jul 2014, 11:26 AM Reply Like
  • mjtroll1
    , contributor
    Comments (2932) | Send Message
    the ewz/eem is at top of multiyear downtrend.. would agree that good opportunity to sell/lighten up with a stop above prior high (on pair)
    29 Jul 2014, 11:38 AM Reply Like
  • Tack
    , contributor
    Comments (16560) | Send Message


    The EWZ fell 60% from its 2008 high. Now, it's only risen back to 50% below its old high. It hardly suggests it's topped out unless one expects economic conditions to get progressively worse, which is a matter completely apart from the "trend."
    29 Jul 2014, 11:53 AM Reply Like
  • Capt Jack Daniels
    , contributor
    Comments (1466) | Send Message
    Tread very lightly in Brazil.


    Brazil is a good example of the bad way government can get in the way of business and profits.
    29 Jul 2014, 11:59 AM Reply Like
  • zerosum2
    , contributor
    Comments (99) | Send Message
    Brazil equity looks far cheaper than US equity, more upside potential than downside. The political atmosphere probably will have to change due to challenges or pressure in general as well as opposition parties. If any equity to sell in this world, the US equity should be on top of the list - its in even bigger bubble than 1999 and 2007. Brazil is still half way to its 2008 high.
    29 Jul 2014, 12:06 PM Reply Like
  • King Rat
    , contributor
    Comments (1907) | Send Message
    Here's an example:
    July, 1999: PE 90+
    July, 2007: PE 35
    July, 2014: PE 16
    29 Jul 2014, 12:21 PM Reply Like
  • zerosum2
    , contributor
    Comments (99) | Send Message
    We all know PE ratio alone cannot used to value or measure a stock being cheap or not. That said, Amazon has a PE ratio of what, 500? Face book has PE ratio of what? 100? Tesla ? Twitter? Netflx? the list can go on.


    And that one stock or two cannot be measure of general market either. So go home and do some real study.
    29 Jul 2014, 12:50 PM Reply Like
  • Capt Jack Daniels
    , contributor
    Comments (1466) | Send Message
    Repeat stay out of Brazil.
    29 Jul 2014, 12:24 PM Reply Like
  • zerosum2
    , contributor
    Comments (99) | Send Message
    Contrarian wisdom seems to show its time to sell US equity and buy Brazil and China. These are the area you'll find future growth.


    As far as Apple, its a great company, but its mature, its like DELL, 3COM, USRobotics or CMGR in their glorious days of 1999. Today's iphone and ipad are wonderful innovations, but remember Palm Pilot devices was once a wonder too, it had their glorious days too, PALM stock was once over $100 stock. Human innovation will continue, today's winner may or may not be tomorrow
    29 Jul 2014, 12:57 PM Reply Like
  • laddyevk
    , contributor
    Comments (2) | Send Message
    Vale is still an excellent long time hold, good earnings great dividends.
    29 Jul 2014, 12:57 PM Reply Like
  • Oliver Sudden Jr
    , contributor
    Comments (33) | Send Message
    I find it fascinating that so many intelligent people think they can predict the future which is impossible. I know nothing about the future but I do know that AAPL can't be as valuable as it was when Jobs was running it.
    29 Jul 2014, 06:52 PM Reply Like
  • Worst Investor Everest
    , contributor
    Comments (107) | Send Message
    I don't know where to put this so I'm putting it here.


    EBR, is the electrical power company of Brazil, a monopoly were the government is the mayor shareholder.


    Actual president Dilma Rousseff, have force EBR to cut prices by 32%, making their revenue decline from $15 billion dollars a year in 2011 to $10 billion dollars a year in 2013. And their EPS decline form $1.5 dollars per share in 2011 to minus $1.5 dollars per share in 2013.


    Marina Sylva, opposition presidential candidate has said that it plans to leave energy prices at market level in both Petrobras and Electrobras (EBR), that Dilma Rouseseff is using both companies for political purposes and crippling them.


    Election in Brazil is in october 5, but it is not expected to be resolved in october 5, but rather in the second round which is october 26. Around that time, not a 100% sure of the date.


    But if Marina Sylva wins the presidential election and keeps its promise to bring back energy price to market level, then EBR could go back to have a revenue of $15 billion dollars and an EPS of $1.5 dollars per share.


    The last time EBR made $15 billion of revenue and an EPS of $1.5 dollars per share the stock traded at $15 dollars per share, which was at a P.E. of 10.


    Right now EBR is trading at $3.13 dollars a share. And It could rise back to $15 if Marina Sylva wins the presidential election, once electrical prices in Brazil goes back to its old level, 32% higher, maybe by the end of next year. Thats about a 400% return in 15 moths if Marina wins the election.


    Downside is that Dilma Rouseff wins the election and keeps forcing the company to sell electricity in Brazil at a loss. Which would eventually bankrupt the company in a few years.


    Do you guys think EBR is a good investment right now?
    15 Sep 2014, 09:27 PM Reply Like
  • Capt Jack Daniels
    , contributor
    Comments (1466) | Send Message
    I'd probably pass on the Brazil investment, just because the stock once traded at that level doesn't mean it will again.
    16 Sep 2014, 11:32 AM Reply Like
  • zerosum2
    , contributor
    Comments (99) | Send Message
    People in Brazil aren't that smart, they are fed lazy with goverment money promised by Dilma Rousseff. They will probably reelect the once Maxist guerrilla fighter Dilma Rousseff, who has been disastrous to investors and shareholders, siphon corporate profits and using public money to buy votes likely keep her in power, so her ministers and lieutenants can continue their corruption and getting bribes. Inflation in Brazi will likely remain high and value of currency shall continue plummet. Investments will fleet the country as soon as its clear that Dilma Rousseff remains in power. The good strategy is to sell Brazil on any rally!
    16 Sep 2014, 12:27 PM Reply Like
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