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Brazil’s Turmoil = Opportunity

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I’m going to let you in on my top secret method for finding bottoms in stocks.

I call it the “blank stare” system.

You can guess where this is headed, right? You’re at a neighbor’s house and the conversation turns to the markets, and someone says: “Hey, Jeff, what are you into these days?”

If my answer is greeted with a blank stare (maybe with crickets chirping in the background for good effect) — then I know my stock has definitely bottomed.

And these days, when I say: “I like Brazil” … I find blank stares pretty much everywhere I go.

I can understand the trepidation.

Protesters are battling police on the streets of the national capital, Brasília. A new president in office less than a year, Michel Temer, finds himself at the center of a still-unfolding corruption scandal (after the last president, Dilma Rousseff, departed under a similarly dark cloud).

The country recently reported its worst unemployment rate in 20 years, according to Forbes.

And all of that bad news is already reflected in every Brazilian exchange-traded fund (ETF) and stock that trades on a U.S. exchange. Most have been lopped in half or worse over the past five years.

What news isn’t reflected in prices?

The latest reports on Brazil’s economy show a different picture – a nation shifting from recession back to growth.

  • Brazil’s central bank believes the national economy grew by 1% in the first three months of the year. If confirmed when the official stats come out in July, it’ll be the first positive gross domestic product growth since 2014.
  • Foreign investors funneled a record $16.8 billion into the nation in the first two months of this year.
  • For the second consecutive month, Brazil added nearly 60,000 jobs to its payrolls.
  • A survey of corporate purchasing managers in Brazil noted encouraging prospects for both the factory and service sectors. Each registered gains in April, with private economists now saying that the country’s “economy probably emerged in April from its deepest recession ever.”

And most major Brazilian companies have already bottomed out. The WisdomTree Brazilian Real Strategy ETF (NYSE Arca: BZF), for instance, is up more than 40% since hitting its final lows nearly 18 months ago.

By that comparison, the market’s reaction to the latest presidential corruption scandal looks like a tremendous opportunity. Most Brazilian shares fell between 10% to 20% on May 18, when the news of Temer’s bribery charges hit the newswires.

Such selling panics are typical, especially after a huge sell-off such as Brazilian stocks have been through for the past five years.

Remember the out-of-nowhere “Flash Crash” of 2010 here? Or the Grexit drama of 2012 that was supposed to sink the world economy? Or the Federal Reserve-inspired “taper tantrum” of 2013?

So how would I play it with an ETF, perhaps?

I’d aim for those focused on small Brazilian companies. Brazil’s economy is huge, and its population of 200 million people is overwhelmingly young. The median age is 31 years. (Compare that to the U.S., where the median is 37 years.) Its demographic profile won’t “age out” like China’s for many more years to come.

The best way to play it would be with the iShares MSCI Brazil Small-Cap Index Fund (Nasdaq: EWZS). The ETF more than doubled over the last 12 months before getting whacked by 12% from the latest presidential bribery scandal. It’s on sale at a recent $13.

At market tops (like now, for investors in most U.S. equities), people have no fear.

At market bottoms (like the last 18 months in Brazil) — that’s all that people have.

That’s why I get so excited (and receive so many blank stares) when I talk about investing there these days.

Kind regards,

Jeff L. Yastine

Editor, Total Wealth Insider

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