Brazil moves to weaken the real and Brazilian stocks take the pain--but the trend seems about over

04/02/2012 1:36 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

So what’s the matter with Brazil? If you own any Brazilian stock in your portfolio, the odds are you got killed in March.

This time it wasn’t worries about inflation or economic growth. It was the currency. The Brazilian real fell another 0.3% on Friday, March 30, bringing its decline for March to 6%. That makes the real the hands down winner as the worst performing global currency in the month.

I don’t imagine that it makes the pain any less to know that the drop in the real was intentional. The government of President Dilma Rousseff is determined to weaken the country’s currency—the real is up 27% from the end of 2008--to protect its domestic industries from a flood of cheap imports. That means taking steps to slow the flow of money into Brazil—so, for example, in March the government expanded a 6% tax on foreign loans—and it means having the central bank, the Banco Central do Brasil, intervene in the currency markets to sell the real.

The central bank’s cuts in the benchmark Selic rate another 0.75 percentage points on March 7 to 9.75% are part of the plan. Lower Brazilian interest rates reduce the amount of money flowing into the country in search of higher Brazilian interest rates. (All that overseas money buys assets denominated in the real and sells assets denominated in dollars or yen or euros or yuan.)

The cut in interest rates also supports the government’s efforts to raise the country’s economic growth rate. After growing by 7.5% in 2010, GDP growth in Brazil fell to 2.7% in 2011 as the central bank repeatedly raised interest rates to fight inflation. Since August, though, the Banco Central do Brasil has switched to cutting rates, after declaring that inflation was under control, in an effort to rev up growth again. The central bank has cut its benchmark interest rate by 2.75 percentage points since August. Financial markets are pricing in a further decline to 8.75%. And the bank is projecting that Brazil’s economy will grow by 3.5% in 2012.

At the moment it looks like the real is stabilizing at 1.80 to the dollar. If it does that would stop the punishment that investors have been taking from the falling real/dollar exchange rate. (If the real is worth fewer dollars, then the shares of your Brazilian company are worth fewer dollars.) And that would mean that it’s safe to get back into Brazilian stocks again—and maybe even a good time to increase your allocation to that market.

Before making a move, I’d like to wait a week or two to see if the real holds near its recent exchange rate. (I’ll give you an update on Jubak’s Picks portfolio http://jubakpicks.com/ member Gerdau (GGB) later today.) The Banco Central do Brasil meets next on April 17 and 18. That might be a good time for a decision on whether or not to get back into the water.

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