Under-Performing Brazilian Stocks Look Attractive Now

Brazilian stocks have been laggards so far this year. Compared the S&P 500’s rise of 14.0% as of May 7th the Bovespa is down 7.7%.  Investors’ attraction towards Brazil has waned in the past few years due mainly due to political reasons. As an emerging market with plenty of growth potential Brazilian stocks look attractive at current levels. While mining and commodity-based stocks can be avoided other sectors such as construction, financial services, retail, consumer goods, etc. can be considered for investment. A recent article in The Wall Street Journal noted the positive views of some investors on Brazil. From the article:

Shares of the 64 companies that compose the Ibovespa index are trading at roughly 11 times earnings, compared with a price/earnings ratio of about nine at the start of 2012.

Some investors point out that the poor performance of Brazil’s main stock index masks healthy demand for exposure to specific sectors, namely retailing and financial services. Even with slow growth, Brazil’s unemployment rate is near a record low and salaries have surged in past months.

The following three charts shows some of the positive factors of the Brazilian economy:

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Brazil-banks-CAR-Chart-1

Brazil-Retail-Chart-3

Brazil-Unemployment-Rate--Chart-2

Source: Economic Chart Pack, April 2013, Banco Central Do Brasil.

In short, a strong case be made for Brazil based on the factors such as the three shown above. The manufacturing sector of the economy recently had the highest ever domestic auto production showing the demand for local sales and rising exports.

Ten Brazilian companies trading on the US markets are listed below for consideration:

1.Company: Itau Unibanco Holding SA (ITUB)
Current Dividend Yield: 3.29%
Sector: Banking

2.Company: SABESP (SBS)
Current Dividend Yield:  2.27%
Sector: Water Utilities

3.Company: Banco Bradesco SA (BBD)
Current Dividend Yield: 3.04%
Sector: Banking

4.Company: Ultrapar Participacoes SA (UGP)
Current Dividend Yield:  2.18%
Sector: Oil, Gas & Consumable Fuels

5.Company: Embraer SA (ERJ)
Current Dividend Yield: 1.16%
Sector: Aerospace & Defense

6.Company: Braskem SA (BAK)
Current Dividend Yield: 3.35%
Sector: Chemicals

7.Company: Light SA (LGSXY)
Current Dividend Yield: 14.48%
Sector: Electric Utilities

8.Company: Banco do Brasil SA (BDORY)
Current Dividend Yield: 6.66%
Sector: Banking

9.Company: Companhia Energetica de Minas Gerais Cemig (CIG)
Current Dividend Yield: 11.40%
Sector: Electric Utilities

10.Company: Cielo SA (CIOXY)
Current Dividend Yield: 3.61%
Sector: IT Services

Note: Dividend yields noted are as of May 8, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long ITUB, BBD

Are Australian Banks In Bubble Territory?

Australian bank stocks are indeed in bubble territory according to an analyst and an investment industry executive. An article in the Australian Financial Review last week quoted Emilio Gonzalez, chief executive of BT Investment Management as saying that Australian banks may face corrections due to soaring asset prices.

Here is an UBS analyst’s take on Aussie banks:

In a research note titled Welcome to the great bank bubble of 2013 sent on Wednesday, UBS analyst Jonathan Mott said banks were low growth companies, heavily exposed to a housing market downturn and unemployment.

“As with all asset bubbles, they can go higher and for longer than many expect,” Mr Mott said. “As Chuck Prince [former chief executive of Citigroup] famously said ‘As long as the music is playing, you’ve got to get up and dance’. All we can say is buyer beware.”

It was “fundamentally flawed” for investors chasing yield to compare dividends from more risky bank stocks to lower rates on much safer term deposits and government bonds, he said.

The share prices of Australia’s banks have reached a record high at an average of 14.9 times earnings, despite subdued demand for lending.

The market capitalisation of Commonwealth Bank of Australia and Westpac have surpassed $100 billion and the big four are ranked among the world’s top-11 by market capitalisation.

Click to enlarge

Aussie-banks-Bubble

Quantitative easing by central banks around the world, where their bond buying has pushed global interest rates down, have led investors to select alternative assets offering higher yields.

Combined with falling term-deposit rates and the tax advantage of franking credits in Australia, investors have jumped into banks because of their track record of producing excellent earnings, high dividends, sound management and prudent regulatory structure. Bad debts remain benign, housing markets stable and the unemployment rate of 5.6 per cent is relatively low although edging up slowly.

Australia is also leveraged to the fastest growing region in the world, Asia.

Source:  Banks enter bubble zone: analysts, Australian Financial Review

Hat Tip:  The great Aussie bank share price bubble, FT Alphaville

Related ETFs and Stocks:

  • iShares MSCI Australia EFT (EWA)
  • Australia and New Zealand Banking Group Ltd (ANZBY)
  • Westpac Banking Corp (WBK)
  • National Australia Bank Ltd (NABZY)
  • Commonwealth Bank of Australia (CMWAY)

Disclosure: No Positions

The Largest Canadian Companies By Revenue 2012

The largest Canadian firms by revenues from the Fortune Global 500 list for 2012 are listed below:

Country RankCompanyGlobal RankCityRevenues($ millions)
1Manulife Financial181Toronto, Ontario51,548
2Suncor Energy255Calgary, Alberta40,231
3Royal Bank of Canada282Toronto, Ontario37,233
4Power Corp. of Canada335Montreal, Quebec33,277
5George Weston338Toronto, Ontario32,735
6Magna International385Aurora, Ontario28,748
7Toronto-Dominion Bank403Toronto, Ontario27,590
8Bank of Nova Scotia409Toronto, Ontario27,091
9Onex419Toronto, Ontario26,168
10Husky Energy466Calgary, Alberta23,623
11Sun Life Financial485Toronto, Ontario22,831

Source: Fortune Global 500, Fortune

Comparing The Equity Market Performance Of Canada And Mexico

Investing in emerging stocks can yield higher returns than developed stocks. As the name implies, companies in emerging countries have plenty of room for growth whereas companies in the developed world mostly operate in a saturated market. Not all developed companies can be successful by moving into emerging markets. In fact, only some of the developed companies are successful in expanding overseas especially in developing countries.

In this post, let us take a quick look at the performance of Canada and Mexico using the country specific ETF as a proxy for the two equity markets of these countries. In all the three periods shown below, the Mexican ETF easily beat the Canadian fund. Over the five year and long term the difference in returns is substantial.

1. 1-year return of Canada vs. Mexico ETF:

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EWC-vs-EWW-1-Year

2. 5-year return of Canada vs. Mexico ETF:

EWC-vs-EWW-5-Year

3. Long-Term return of Canada vs. Mexico ETF:

EWC-vs-EWW-Long-Term

Source: Yahoo Finance

The iShares MSCI Canada ETF (EWC)  and the Shares MSCI Mexico ETF(EWW) has dividend yields  2.12% and  1.01% respectively.

Disclosure: No Positions

Why Australian Equity Market Is Prone To Violent Corrections

The Australian stock market has performed well so far this year. The benchmark S&P/ASX All Ordinaries Index is up 5.77% on a price basis and 9.67% on a total return basis YTD. Due to the fall in commodity prices the index has not regained the level reached before the global financial crisis. However the long-term return of the index since is pretty impressive as shown in the chart below:

Click to enlarge

Australia-All-oridnaries-Index-Since-1985

Source: Yahoo Finance

The Australian economy is a resource-based economy similar to Canadian and South African economies. The country is called the “The Lucky Country” for the weather, lifestyle and history, it can also be said that the country is lucky due to the vast amount of natural resources available that can be exploited. For example, some of the major commodity exports of Australia are: coal, iron ore, gold, meat, wool, alumina and wheat.

Until last year, the Australia enjoyed 20 years of continued economic growth as a result of the boom in commodity and energy demand from Asia especially China according to CIA’s The World Factbook. During the 20 year period economic growth averaged 3.5% a year. The services sectors accounts for 70% of the economy with the rest split between manufacturing and agricultural sectors.

An economy based on simply digging up stuff from under the ground and selling to other countries has two major risks. First there must be demand for the stuff. Secondly the prices that buyers are willing to pay must be high enough to make a profit. If  the demand declines and/or prices plunge then the economy will adversely impacted. The Australian economy is facing this scenario. The Australian’s economy’s high dependence on China makes it vulnerable to any slowdown in China’s growth.

Though the Australian equity market has been on a upward trend for many years now the chances of a strong correction are high. When corrections do occur they can be very violent. The chart below shows that the FTSE Asfa Australia All-Share Index plunged 50% or more with little prior warning:

Click to enlarge

Australia-All-Share-Index-Since-1965

Source:  Australian exposure: an interesting opportunity?, Gray Issue, April 26, 2013, Allan Gray, South Africa

Hence investors in Australian equities have to be cautious and monitor their investments. However depending on an investor’s profile and goal, a moderate to low exposure to Australia in a well-diversified portfolio would not hurt.

Five Australian stocks trading on the US markets are listed below for further research:

1.Company: Westpac Banking Corp (WBK)
Current Dividend Yield: 4.88%
Sector:Banking

2.Company: Australia and New Zealand Banking Group Ltd (ANZBY)
Current Dividend Yield: 4.72%
Sector:Banking

3.Company: National Australia Bank Ltd (NABZY)
Current Dividend Yield: 5.27%
Sector:Banking

4.Company:Commonwealth Bank of Australia (CMWAY)
Current Dividend Yield: 4.98%
Sector: Banking

5. Company: BHP Billiton Ltd (BHP)
Current Dividend Yield: 3.37%
Sector:Metals & Mining

Note: Dividend yields noted are as of May 3, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

The iShares MSCI Australia ETF (EWA) offers a simple and easy to invest in Australian stocks. The fund has total assets of over $2.60 billion and a distribution yield of 5.02%.

Disclosure: No  Positions