As Nassim Taleb said, we’re more inclined to discuss what we own than what we don’t, contrary to the traditional position of having conflicts of interest when discussing our holdings. Well, the quote is:

‘Don’t tell me what you think, tell me what you have in your portfolio.’

Nassim Taleb

I had invested in Brazil before and currently hold a small equity position in it.

So my view on Brazil:

Real Estate – stay away from it. I’m not an expert, but if you go through Numbeo (www.numbeo.com) and check the yields, you’ll find they’re around 4-5% across different cities. That’s not enough to convince me to consider it, unless you’re thinking about property and real appreciation. In that case, I believe there are better deals. Investing in real estate funds requires creating a local account.

Bonds/deposits – Brazil’s central rate is at 13.75%, with rates like 3m at 13.75% and 10-year at 11.5%, resulting in an inverted yield curve. It’s challenging to get exposure to short-term bond ETFs, and buying short bonds is expensive (and it’s hard to find a broker abroad that offers them). Additionally, you need to roll them over, which isn’t feasible for an individual investor with limited time. There are some ETFs on long-term bonds that you can buy, but they come with a duration risk that I’m not keen on. They are also small with limited liquidity, so you would be paying considerable spreads on them. An example is the DWS Brazil Bond Fund, with only 32 million USD in assets. Traditional banks are paying over 15% on deposits. However, you need a CPF, a fiscal registration number, to open an account. I will be traveling to Brazil for a bicycle race in October/November and will investigate further. I will provide updates.

Equities – This is the easier way to get exposure to Brazil. Let me explain why it may be a good investment. Historical returns depend a lot on the moment you invested:

• Returns and fundamentals on Brazil, Emerging markets, and ACWI. Source: MSCI

At 5 and 10 years, you would have been better off investing in ACWI (All Country World Index) rather than Brazil. But compared to emerging markets, this is no longer true. But look at that P/E and P/E Fwd. Well, the index is trading at a low valuation.. And I like cheap things.

• Forward PE Source: Yardeni.

The Index is trading at 7.6 forward multiple. It was trading much better, but after a 30% return YTD, it looks less attractive. I still believe there is room for multiple expansion and gains on earnings. Still at 7.6, it does not trade at these values since 2008/2009. Why is that? Well, earnings are high, at all-time highs, but they don’t necessarily need to drop significantly in the near future.

• Earnings historical and forecast. Brazil MSCI, Source: Yardeni.

Profit margins are also expected to return to pre-war/Covid conflict levels, indicating that they are not primarily influenced by those spikes.

Check all graphs at https://www.yardeni.com/pub/int-mscilb.pdf

The index is composed with a high exposure to commodities prices (Vale, Petrobras) and financials. The MSCI Brazil has now a dividend above 9% TTM, which may not be sustainable, but nothing indicates it will be totally cut. The Real has been more or less stable in the past years, national debt is at 88%, down from covid highs, and inflation is stable.

• Inflation and Brazil central bank interest rate. Source – Schroders

You can gain exposure, for example, through iShares MSCI Brazil UCITS ETF USD, which distributes a dividend, or through Amundi ETF Brazil, which is a cumulative ETF (meaning it doesn’t distribute a dividend but instead capitalizes it). This approach saves a lot of work in filling out tax forms and is more tax-efficient.

Personally, I would consider selling if the index increases another 50%, as it would trade in line with historical valuations. From there, you need to believe in the Brazilian economy for a long-term position, considering possible political and currency risks. Still, at current prices, I believe it offers a decent margin of safety as a long-term investment. Obviously don’t expect a ten bagger from a country ETF!

Some posts are a bit more technical, while others are more theoretical. However, I won’t delve into the small details. I will draw your attention to the idea, and if you’re interested, you can study it further.”

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