Short 🇧🇷 Brazil: IBOVESPA / EWZ & BRL (long USDBRL)

Hello @Weston Nakamura ,

Thanks for your follow on. By Ill-informed I meant lacking the broader context, just that. I apologise if the tone seemed inadequate.

Look, since Bolsonaro disgracefully took the presidency, there is the risk of state-intervention policies. He is / was backed by a incompetent and limited minister, Paulo Guedes, who gave him a 'liberal aura', let's say. This was of course fragile and since the beginning there are tensions between the so-called "market / liberal" agenda and Bolsonaro's old ways.

I am not sure if there was a "Bolsonaro rally", there have been huge foreign outflows during 2019 (you may check) and the 'rally' was mostly sustained by local investors who believed in his incompetent minister of economy. The pension reform was approved in 2019 by the congress despite Bolsonaro and his Minister, who actually did not helped much (Bolsonaro was openly against it). There was no relevant economic agenda since this reform.

The situation deteriorated with covid, for the reasons I mentioned and worse. Bolsonaro openly used the situation to try to gather support for a coup. What is happening in Brazil history may judge later as a genocide, as the federal government actively sabotage the efforts of the local governments to contain the pandemic. (There are investigations going on about this). 

Back to the economic situation, the congress approved a stimulus check (Bolsonaro was against lockdowns and against helping the people, then he changed his mind when his ratings improved because the checks) which was a bit exaggerated for the local reality and pushed inflation, construction, retail, and so on. Fast recovery.

The Central Bank also exaggerated by lowering the base rate to 2% when most analysts were saying that 3.75% or 4% would just be fine. By doing this BCB turned the real into a easy prey. Get money paying 2% in a currency which is deteriorating and move elsewhere. i.e. more outflows, more deterioration

The real is the WORST performing currency as you noted and it is all our BCB fault - another incompetent appointed by Guedes. Other factors may build on the top of that but I believe that our BCB is the worst offender. The BCB intervention is already happening - to weak real ! 

Brazil received inflows since past October for our surprise, I would say, probably related to value-commodities rotation and the narrative of a incoming commodity super-cycle.

By the way, if you do not like shiny P/Es, forget Brazil, Ibovespa is mostly value and commodities. 

The episode from past week indeed put an end to the hopes of local dumb extreme-right investors who were backing Bolsonaro. So the reading that nobody believes in Bolsonaro anymore is correct. But I would argue that this was true for anyone informed since 2019 - it is no-news. 

This (Petrobras intervention and the reaction to it) may have been a bit exaggerated (I would say on purpose) because there are many people pissed off with Bolsonaro.

Although Bolsonaro keep doing his best to destroy Brazil, kill its people and destroy the country's credibility, there are plenty of people working to mitigate his ways. The supreme court, local governors, part of the congress and so on. 

Today, yet again, he tried to undo part of the caos (same old, he tests limits, then withdraw a bit). Congress acted quickly to give signals that the agenda will pass, and so on.

Petrobras up 12%, Eletrobras up 8%, etc.

I am not bullish about Brazil, but I do not see a big downside IF there is no global correction or something like that. 

Many brazilian stocks are on the same level of past year's worse moments, Banks are already down again (big weight on the Ibovespa), so being Short EWZ is basically being short commodities (VALE, CSN, meat, grains, and so on). Does not really make sense for me. If the global situation deteriorate, it is probably better being short elsewhere. 

If there is a global correction, Brazil will follow for sure.

If the local political situation deteriorate further, Petrobras will be a minor problem as the world will have a extremely dangerous individual in full power in Latin America. Maduro is nothing compared to Bolsonaro.

On the other hand, as I mentioned, if commodities or local vaccination kicks in, I do not think investors will avoid VALE or CSN because Bolsonaro, and there are plenty of multinacional companies in Brazil such as Embraer or Weg that are more or less exposed to the world economy.

Flows are important but the won't explain everything.

Best Regards,

Hey everyone, thanks for all the feedback and commentary! Sorry I've been slammed the last 30 hours, meant to post a few charts after market. I'll include below but know its obviously not up to date, and will come back tp address all.

In the meantime for the sake of time I'm adding a leg to the Short EWZ: Long PBR (Petrobras ADR), for a pair trade:

Long PBR / Short EWZ

PBR's -20% 1 day decline yesterday vs the broader index -4% while crude +3% warrants a sharper upside immediate term bounce back vs the index. If / when in my view Brazil continues to get sold by foreign outflows over the med term, that's by and large priced into PBR and not yet at all fully priced into peer index constituents. 
Downside risk Brazilian assets remains of Bolsenaro exerting heavy hand of gov onto the elec sector among others. The only one that’s actually exempt from capital flight at this point is Petrobras - they "took the medicine" early, so ironically, this is what you go Long to go Long Brazil. Vale, the banks, they're trading cheap for a reason - we constantly hear of "no hedges left" because of too much liquidity in the system, yet liquidity is avoiding Brazilian assets. I don't care about valuations, I care about flows of capital and investor sentiment, which is ultimately what prices assets. Not "cheap" "expensive" "good/bad business."

I also meant to post yesterday that I forgot-- one risk is central bank fx intervention. Which they did intervene yesterday after all, about $1bn USD in swaps. This never seems to work and only seems to make things worse- they intervened in FX on a number of occasions in 2020, yet still worst performing FX (what would be the result if they didn't intervene- perhaps worse but perhaps better). 

Below chart yesterday's 1 day price action of the index and  currency correlations holding and  stabilizing as crude rallied mid day. Note the 4 million share volume print on EWZ at 12:35pm EST to mark the top of the intraday upside @Shawn Leveridge  for super short term trading color. 

This is what made me think of / add Long Petrobras to made this a pair.

Will come back with more. Thanks @Seahyung Park for helping. I purposely made it "obscure so that people who prob shouldn't rush into trading options don't do so 

And @Lucas Figueiredo if you disagree, that’s 100% fine as @Thomas Gentil does. if I have the wrong information and basing investment thesis off of it, that’s indeed "ill informed" aka misinformed, and if that's what I'm doing, please let me know specifically where and how I'm "ill informed" as that is dangerous/would be critically helpful to all to point out. Ultimately that’s the point of these trade IDEAS (not trade recommendations, not trades, but trade ideas. discussions). If however, you're saying my idea is ill-informed because you feel I lack broader context, what you mean is that I'm "un-informed or under-informed," and you very well may be right. However, I beg to differ, and ironically I would say that you may be under-informed of my knowledge of the Brazil markets which extends farther than what I wrote (in other words, what I wrote ≠ 100% of what I know). If you see @Erk Oghuz comment below (Erk I WILL get back to you, but keep eye on TRY move yesterday!) - you can see that I actually do have an informed track record on BRL. If you aren't aware of this, you can see via @Moritz Heiden & @Seahyung Park 's comments that they assume I wouldn't just rush out nonsense macro tourism headline hopping trade ideas, and that I would only post something if I have some context. So you should assume people on the Exchange are thoughtful and give the benefit of doubt first/assume you don't know them rather than they don't know about what they just posted about. I personally don't have any loss of confidence, but throwing around terms like "your ideas are ill informed" does nothing at best and discourages sharing ideas at worst, which is unnecessary and unacceptable to me. 

I can say the same on your BRL weakness reason, which you attribute to a 2% rate. Sure, I suppose, but that seems highly under-informed and over simplified to me. WHY is it at a "laughable" 2%? Well obviously COVID is the first thing that’s always cited on the Selic rate and guidance (dropping) policy. But that’s also an arbitrary snippet of time, considering rates have been on a multi decade decline through recessions predating Bolsenaro and Dilma Rousseff. There are soybean exports to China thanks to a weakening BRL. There are foreign fx reserves pressuring. And countless other factors. 

Is 2% "low" ? Just because its at historic lows, doesn't mean that’s a relevant metric. I'd say its actually high relative to market expectations which are far more valuable a metric, and BCB itself seems to agree enough to add a slide on their deck

BCB, by the way, is going to have a historic moment tomorrow with Bolsenaro signing the senate legislation that keeps the central bank independent, an ongoing 30 year effort. and just in time. So rate hikes for march are now priced into markets following yesterday. That means if they don't hike rates, BRL plummets. If they do, BRL may still fall as it'll likely be accompanied by dovish talk. Why is Bolsenaro signing this? Maybe give central bank independence so as to be able to justify / give the image of not being heavy handed with the private sector balance out? All eyes are on BCB and Bolsenaro's other potential next "target" state industry. Valuations can be as cheap as they want to be, I'm not making a value case. I'm making a perception of foreign investors case. Foreign capital to a major liquid market comes in like a tsunami in when theres a major pro biz policy change, and leaves in waves/stages. I've seen this personally with Abenomics start → current. Bolsenaro rally was from foreign inflows expecting pro biz measures and pension reform bulls. When he not only falls short of delivering, but starts becoming an interventionist, and an erratic one at that (explicitly and specifically assuring no intervention as recent as last week before going back on his word), that doesn't sit well with foreigners. And FYI Turkey is a totally different scenario, that’s the removal of a technical rule by the former FinMin to attempt to stop foreigners from shorting the lira and instead had the effect of foreign capital liquidating lira denominated assets- the recent reshuffling took that rule out and capital rushed back in. 

And just a word on being on the ground as per @Thomas Gentil - of course there are advantages of being local. there are also disadvantages, and there are differences. if you're buying Vale shares in your local currency, that’s entirely different from buying with USD or JPY or EUR for with the CURRENCY has a 30% move let alone share prices. I will also say (and I'm not saying this applies to you Thomas, this is general), local people can be their own worst enemy if their investment market is foreigner-heavy but non-sticky. Foreigners seek local expertise, which then makes (some) locals feel they have a superior edge, which they may. But if you then lose sight of knowing how and when to factor in foreign flow sentiment, you're value trapping yourself against what's relevant. I know this being in Japan, and I exploit this. Foreigners think they don't know enough and will blindly chase. Domestics tend to be highly arrogant and therefore blind to outflows and wonder why they get crushed, because they're overly focused on how shiny their single digit P/E is (its single digit for a reason). So, if there is unique value to be shared by local investors, then obviously that’s greatly useful- for example, I was discussing this yesterday w/ Ed Harrison, but did you know that Stephanie Kelton (MMT professor) is wildly popular in Japan, and prob more well known here than in the US? That's important color. But we don't have to be on the ground to see what EV/EBIDTA a company is trading, and we have fx risk. I personally think that I trade US better than many do BECAUSE I'm not there, and not influenced day to day by unavoidable political polarization (and I know I would probably be). I understand my country well, and I'm watching from a bird's eye view, totally neutral without any bias or national sentiment. Whats the difference between me looking at Brazil or Turkey or US or UK from Tokyo? 

So again, my view is that Bolsenaro made a huge unforced error, that damage to the foreign psychology will not be forgotten soon. It can be built back over time, but it can be completely lost in a heartbeat. my bet is that foreign flows leave the same reason they came in- pro business Bolsenaro → no longer pro biz Bolsenaro. Yesterday wasn't just PBR, it was Brazil wide. Not just the Real, Brazil CDS moves in line with Petrobras.  Petrobras took its hit already, theres relative certainty there and the company went on the sale rack -20% off in a day when crude is +4% and recorrelating. Long Petrobras / Short everything else under perceived risk. 

Does anyone have any pushback on the foreign flow sentiment thesis itself and not Brazilian asset valuation? Whats a catalyst to entice foreign inflows?

Is this somehow gonna affect the real estate market short/long term?

Hey everybody,

Weston - great analysis on the current market in Brazil.

I am a Brazilian investor and stock trader, been living here most of my life but I do not entirely agree with the above trade. As stated by Lucas Figueiredo below, there are a few other factors that keep me confident in the Brazilian stock market. 

Yes our president is a righ-wing extremist who dreams of a dictatorship, but that is very unlikely to happen since our democratic institutions are very strong here. 

There are solid companies in the commodities sector like CSNA and VALE that have been market leaders and continue to outperform several major indices. CSNA3 alone is up 150% the past 6 months and it is a VERY good company. You can trade this company with a US ADR called CID. Other strong stocks in the commodities sector are KLBN11 and Suzb3. Brazil is also a reference for Agro-Tech and a lot of the agro stocks have been rallying such as SLCE3.

The last 6 months have been RECORD months for IPOs in the Bovespa stock market, notably companies like Locaweb (LWSA) and Meliuz(Cash3) and Enjoei (ENJU3) which are disruptive tech/fintech companies. 

this news article from 4 days ago (use google translator)

https://economia.estadao.com.br/noticias/geral,brasil-tem-recorde-de-ipos-e-emissoes-de-acoes-em-2021-conheca-as-13-empresas-que-entraram-na-bolsa,70003621099

There has also been a RECORD number of new local investors in the Brazilian stock exchange, so there are more sophisticated investors today than any other time in the history of our country.

https://valorinveste.globo.com/objetivo/hora-de-investir/noticia/2020/04/03/numero-de-pessoas-fisicas-na-b3-tem-alta-recorde-e-bate-224-milhoes-em-marco.ghtml

Other great plays:

Taurus (Tasa4), which has over 25% of the US gun market and over 50% of the Brazilian gun market.

PetroRio (RIO3) which is an oil refinery company and the its on the move.

IF anyone is seriously interested in trading Brazilian equities feel free to reach out. Most major BRL companies are listed as ADRs on the Us markets.

Overall, I do think the indices will recover here. CSNA3 and VALE3 make up 14% of the Bovespa index and they are on a roll so this should push the indexes up. 

From an equities perspective, I am bullish Brazil. I am still neutral on the BRL/USD trade, I find it hard for the Real to devalue anymore...it will probably stay in this range for another 6 months. 

You may be right, but seems early if capital flight will eventually occur. Overnight futures have recovered todays gap down (100%) and implied vol on your option suggestion is only 45-50 (IV% at 62% but spiking) so doesn't appear high yet. This is one to watch closely in my opinion and stage into over next 24-48 hrs once obvious but before IV goes higher. You could always buy into BZQ (ProShares Trust - ProShares UltraShort MSCI Brazil Capped). But it is still gapped up into extended hours, interesting to see what it all does in the am. What do you think Wes, more from a technical vs thesis point of view?

The Brazilian far-right president indeed lost his credibility with investors abroad and internally was well. His ratings are melting due the end of our "stimulus checks", his unbelievable mishandling of the pandemic (promoting agglomerations, being against lockdowns, promoting false medicines and - wait for it - being against vaccines). 

Well, that said Brazilian stocks are incredibly cheap, economic numbers are better than most countries (stimulus checks), banks have huge provisions against defaults, analysts say commodity stocks are still cheap (VALE, CSN, etc), the real is heavily unevaluated (fair value for USD is between 4.5-4.8 BRL) . The pandemic will probably get much worse in the short term but IF the country can get vaccines their public health system can vaccinate up tp 10 million people per day (yeap, you heard that right). 

So, it is all open now. If the virus recedes by itself (India?) OR the vaccination kicks in, commodities, banks and retail could rally even if petrobras laggs behind.

On the other hand, the political situation can deteriorate further OR SP500 can correct (for sure IBOV will follow). Sidenote: real (BRL) is weak because the base interest rate in Brazil is at laughable 2%. If the Central Bank corrects this (as Turkey) real could recover some lost ground quite quickly.

Sorry, but your idea was quit ill informed as you see, there is a big context around the fall today.

1M 25 ∆ Puts on EWZ
 
1 Month, strike 25 Put on EWZ?

Please correct me....

Still haven't got into options yet, but I am fascinated with the prospect of this having a ripple effect on oil markets in general.
Maybe buying hard deltas on XLE, XOM or w/e oil stock tickles your interest is another way to play this; giving up on the first domino and trying to get in early on the second one?

Interesting. On the other hand Brazil might benefit from having commodity heavy industries, In fact, their equities often move in strong correlation with commodities. But then again...

Thanks @Weston Nakamura Great idea as always! Do you mind giving a brief comment regarding TRY ?  I am long USD/TRY for dollar strength and eventually lira retreat scenario, but your Brazil play seems more interesting. As you said USD/TRY is more about Turkey than the US