Chartwell ETF Pick Brazil Small Cap (BRF)

January 31, 2010 6:51 am

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor. click here.

Rationale and Overview: It is a little like catching a falling knife in the wake of the
sharp pull back in emerging markets, but you might want to take a small position in
BRF based on the following facts. Brazil’s currency, the Real, remains one of the most
attractive in the world up 27% in the past year and foreign exchange reserves are at
$240 billion. The strength of an economy’s currency is generally a good reflection of
the strength and health of the economy.

Brazil is also exhibiting strong growth coupled with relatively low debt. It is just about
the only investment grade country where inflation is slowing with an inflation rate of
4%, at the low end of the range of the past decade. Brazil’s exports are diversified
and its current account is in very small deficit, at just over 1% of GDP. On the debt
side, the country has a 12% gross external debt and 43% government debt as a share
to GDP (the US numbers are 95% and 62% respectively).

An argument against Brazil would be that commodity prices (as the US dollar rises) are pulling back and that
Brazil is seen as basically a commodity play. The reality is that Brazil’s major exports
are manufactured goods and that BRF offers investors 40% exposure to consumer
product and services companies - a great play on the rising middle class in Brazil. This is why I would go with BRF over large cap EWZ
which is much more oriented to the materials, mining and financial sectors.

Catalyst: The catalysts are that emerging markets are perhaps oversold and that
Brazil is the most attractive of all the BRICs, with the exception of high political risk, energy heavy Russia, on a price
to earnings basis.

Tip: Think about coupling/hedging BRF with the inverse emerging market ETF (EUM)
in case the emerging market pullback continues.

Risk Factor: The risk factor is high and I suggest using BRF only in moderation and
using a 6-8% trailing stop loss.

To see a chart on BRF
click here

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