The asymmetry in being short BRL against EUR (4.2) or USD (3.7) is not there anymore (see my thesis there with details there : http://factualmacro.blogspot.ch/2014/08/short-brl-charts-only.html ) - As a starter, one simple chart support my view - see below : the current account deficit is closing at a rapid pace. There is still significant room to improve - as most of the move is due to reduced imports and current account /GDP is still at a wide -4% - to help the external sector to actually contribute to GDP growth but nonetheless this is a much welcome development that will resonate with the investor community, especially non BRL denominated investors.
Moreover, inflation is topping out and as a result, long BRL Fixed Income is should be a good play @ approx. 12% carry and potential price appreciation and BRL appreciation.
Clearly, industrial production and output gap are at 2009 lows, credit is being tightened big time and fiscal tightening is at his highest since 2002 - there is basically no oil in the economic motor and the gov.is trying to squeeze it even more...So macro data are definitely not rosy! But I believe, after the recent China related fears, most of these info are in the prices of BRL and brazilian equities.
Interesting opportunities in Brazil equities should arise in the months to come with another potential catalyst being China stimulus. As investors are digesting China devaluation, we should expect some volatility down the road, but I believe this is a good time to slowly start building select exposure in Brazil. Factually, we need prices and macro to back our thesis before going in in size.
Now, on a FACTUAL basis, prices are not telling us to change positioning for the time being - but
I would recommend to cut short BRL exposure and start building small exposure in BRL denominated equities with beaten down non-cyclical sectors such as a Telco basket (TIM + Vivo for ex). While it might be too early to look at cyclical stocks, it make sense to start screening for the middle part of the smile in term of gdp beta such as supermarket (Lojas Americanas), few banks such as Bradesco, few local cyclical plays such as GOL Linha Aerias.
As China economy is decelerating fast (last PMI @ 47, 6 months in a row below 50) with inflation well below the 4% upper limit, the probability of monetary and more likely fiscal stimulus is increasing fast. We should also expect much more FX devaluation (20% should be a good start).
Any hint of stimulus in China should also help lift Brazil cyclical sectors. If such a scenario occurs, extremely beaten down global cyclical plays such as FCX (which recently announced that it will raise equity..) could be very interesting, especially after the current market correction.
Let s now wait context for market prices to change so that it help the trade logic resonate with investors.
Stay tuned
