Take Your Dollars and Tax Them 

10/22/2009 11:18 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Brazil knows how to throw a party, but from now on there will be a door charge.

Late Monday, with Sao Paolo's Bovespa index up 79% on the year, the government slapped an immediate 2% tax on foreign purchases of Brazilian stocks and bonds. The goal was to slow speculative capital inflows that had boosted the real currency 36% against the dollar this year. With exporters suffering and a presidential election on tap in a year's time, taxing foreigners won out over cuts in government spending or import duties.

"Our concern is the excess of speculation," said the finance minister. And, for one day at least, it was mission accomplished as the Bovespa shed nearly 3% Tuesday and the real retrenched more than 2%. But the next day, buyers were back at it. Brazil remains one of the world's most dynamic economies and one of its cheapest stock markets. But Switzerland it's not, and now investors have a better idea why all that growth is priced so attractively.

Brazil has recently asserted more control over its recently discovered oil reserves, reserving the leading role in their development for Petrobras (NYSE: PBR) at the expense of foreign oil producers. The government has also clashed with the giant iron ore miner Vale (NYSE: VALE), insisting it invest more in domestic steel production. But that hasn't stopped Vale's New York-traded ADR (which is not subject to Brazil's new tax) from rallying 43% since September 1st.

The iron and the oil will allow Brazil to weather the dollar's decline in relative comfort, something that can't be said for more northerly US trading partners and rivals. The euro's rise to $1.50 "is a disaster to European industry and the economy," a top adviser to the French president said this week. Canada's central bank kept rates at rock-bottom and complained that the Canadian loonie's recent gains would, over time, "more than fully offset the favorable developments since July."

Meanwhile, China's bracing for an even greater influx of hot money than Brazil's, fed by widespread belief that the yuan's dollar peg will, within a year at most, give way to gradual but inexorable appreciation. The Chinese government has adopted a new tone, touting unexpectedly strong growth and highlighting inflation as a risk. Hong Kong keeps having to buy up dollars to keep its exchange rate fixed as foreigners pile in. As Asian currencies appreciate, their issuers will have the same incentives as Brazil to limit indirect investment inflows.

But for now the dollar remains welcome in a variety of lands with sounder finances. It's also overdue for a bounce, just as emerging markets are overdue to correct. Any such letup in the current trends will be a buying opportunity for Asian stocks, writes Dr. Marc Faber of The Gloom Boom & Doom Report in this week's Global Perspectives excerpt. Real estate plays dominate his list of personal investments in Singapore and Thailand, and the rationale is easy to grasp. It's easier to print money than to develop land, and easier still if one is heavily indebted.

Meanwhile, the same strong loonie that's giving Canadian exporters fits has enriched US investors in the high-yielding energy trusts north of the border. Gordon Pape recommends one with a double-digit current yield, a substantial earnings cushion, and bright growth prospects.

Yiannis Mostrous ventures further afield in suggesting shares of Indian wireless leader Bharti Airtel. The stock lost half its value in the last few months amid a price war that has dimmed growth prospects. So, talk's still cheap, inflation hawks should note.

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