Barrons – Aug 2016

Reprinted from Barron’s

3 Brazil Headlines: Temer Fingered, Petrobras Sales, REITs Attractive?

The iShares MSCI Brazil Capped exchange-traded fund (EWZ) is up nearly 2% today, pushing the fund’s weekly performance well ahead of the 1% decline in the iShares MSCI Emerging Markets ETF (EEM).

Some of the headlines coming from Brazil:

Brazil’s interim President Michel Temer denied allegations that he had a part in a graft scheme at state oil company Petroleo Brasileiro or Petrobras (PBR), the country’s biggest ever corruption scandal. Petrobras shares are up more than 2% this week. The Wall Street Journal in a story today writes:

” … Temer denied the claims made in plea-bargain testimony by Sergio Machado, former head of Petrobras Transporte, or Transpetro, a fuel-transportation and logistics subsidiary. Mr. Machado has testified that in 2012 he organized, at Mr. Temer’s request, a donation of 1.5 million reais (about $432,000) from a construction firm to Mr. Temer’s political party, in exchange for Transpetro contracts. Mr. Temer dismissed the accusations as “frivolousness”… “irresponsible lies” …But the sweeping charges laid out by Mr. Machado may not be quickly or easily dispelled. They implicate some two-dozen politicians from seven different political parties …”

Meanwhile analysts project that Brazil officials will impeach President Dilma Rousseff by mid-August.

Petrobras, Brazil’s state-run oil company, received bids for a stake in its fuels-retailing unit BR Distribuidora in recent days, chief executive Pedro Parente said in his first television interview since taking the helm June 1, according to Reuters. He is trying to speed up the sale of assets — $14 billion in hoped-for divestments of oilfields, processing and distribution systems, power plants and other operations — to cut its $130 billion debt. See the Reuters story, Petrobras received bids for unit in recent days, CEO

Tierra Funds Jamie Anderson said in a prepared release that the U.S. Federal Reserve’s decision to delay an increase in interest rates provides “much needed breathing room” for emerging markets, especially China and Brazil. Tierra is  promoting a so-far small and illiquidfund it launched in December, the Tierra XP Latin America Real Estate ETF (LARE), which is focused on Brazil and Mexico real estate. Anderson the writes:

“Brazil’s central bank released its minutes Wednesday from its latest policy meeting and noted, among other things, that rate cuts will be on hold a little bit longer as inflation is still well above target levels. That said, year on year CPI has fallen from roughly 10.5% to 9.6% and the central bank believes we should see moderately lower CPI as we get into the summer season. We continue to view risk-adjusted yields from Brazil REITs as quite attractive and have noted above-average trading volume on many non-REIT real estate equities lately, which to us suggests that investors are positioning for what many expect to be a constructive second half of the year.”

The Tierra real estate ETF is up 16% this year, in line with the much larger and more diversified iShares Latin America 40 ETF (ILF).