Hey There Income Hunter,

 

A month into the Ukraine/Russia battle, alliances are becoming clear.

 

The first place to look is which countries put sanctions on Russia and which haven’t.

 

For the west, the US, Germany and Canada have gone to the extreme in punishing Russia, including financial and central bank sanctions. They have sent military and technological equipment to Ukraine and put a ban on airspace, oil and gas imports.

 

At the other end of the spectrum Brazil – unsurprisingly – did not go against Russia in any category. 

 

It’s not a surprise because Brazil imports chemical, mineral and transportation products from Russia.

 

Meanwhile, the US is the second-largest trading partner for Brazil after China …

 

This makes the Brazilian stock market a very valuable asset.

 

Today, I’ll show you why you should consider Brazil as a buy as the US suffers through a growth slowdown and de-dollarization period. 

 

Vamos!

 

To Begin With …

 

The US has many issues to deal with, including out-of-control inflation and slowing growth.

 

Meanwhile, the Fed is handcuffed with an insurmountable debt burden that restricts it from being able to deal with either issue efficiently. 

 

This forces traders to look to alternative markets, and I think Brazil is at the top of the list for a few reasons:

 

1. 1. Brazil’s stock market valuation is cheap and it has superior returns on equity compared to emerging or developed markets
      
   2. It is a great China proxym plus as China stimulates its economy, it will benefit Brazil since China is the South Americans’ No. 1 trading partner.
   3. It is also obvious that China will have to convert much of its dollar holdings into stockpiles of commodities but could also invest in the local currencies of its trading partners, which would be huge for Brazil.  

 

Where Is the Risk?

 

Brazil is a key supplier of commodities to the world.

 

It is a top exporter of soy, iron ore and corn (21% global share) and a key nickel miner.

I see two reasons why Brazil has not kept up with other commodity exporting countries: inflation and elections. 

Brazil will vote for a President in October of this year. The incumbent, Jair Bolsonaro, is currently trailing former president Luiz Inacio Lula da Silva in the polls.

 

Some feared that Bolsonaro would ramp up government spending early this year to improve his popularity and his reelection chances. Such spending would aggravate inflation and depreciate the Brazil Real (BRL). The central bank already raised interest rates from 2% to 11% to combat inflation

 

Fears have dissipated, however, because budgetary expenditures have not increased and the budget deficit is now at the lowest level compared to GDP since 2014. 

 

Meanwhile, inflation has stabilized at 10% and the central bank has signaled that it is close to the end of its tightening cycle. 

 

The MSCI Brazil ETF (Ticker: EMZ) is strongly correlated with the Bloomberg Commodity Index (BCOM).  With all the Russian oil & gas stocks axed from the emerging market index universe, PetroBras (Ticker: PBR) is now the largest EM oil and gas weight in indexes like MSCI EM. 

 

Consider the money that may flow from the likes of Gazprom Rosneft and Lukoil into PBR with the Russian sanctions in place. 

 

Notice the runway Brazil has once it gets going to catch up to the overall BCOM:

 

 

Brazil may start to outperform once its central bank signals the end of the rate hike cycle.

 

However, I believe investors will increase their exposure to Brazil in the coming months as the Brazilian mining and agricultural industry gains market share at the expense of sanctioned Russian counterparts. 

 

On the political front, Lula’s consistent double-digit lead in the polls should remove the uncertainty about the outcome. 

 

Markets may fear Lula’s left-wing policies, but he was also the president during Brazil’s epic bull market between 2003 and 2010.

 

Bring It Home

 

To be honest, whether the war in Ukraine ends soon or not, I believe the broader conflicts will continue to escalate.

 

Hopefully it remains an economic war with sanctions and retaliations back and forth until a settlement is reached.

 

Either way, the US is hurting itself as much as they are hurting Russia or anyone else with sanctions.

 

The US sanctions will accomplish less over time as foreign countries reduce their exposure by selling their dollar assets to buy the local currencies of their trading partners,

 

So, long Brazil and short the US makes a lot of sense – and both legs can work as the growth numbers decline in the US and rise in Brazil.

 

Power Income Trader specializes in paired trades and we are crushing it.

 

Consider joining my PIT Crew and gain insight and inside intel on the global macro drivers that give you a massive tailwind behind your trades …

 

And as always …

 

Live and Trade With Passion My Friend,

Griff