Is Brazil Junk?

2009 news would have seen Brazil in the top news as trading volumes rose to a record in 2009 at Bovespa. At the market high, it’s hard to find caution. Even if one does find that solo voice, it’s hard to act on it owing to the human tendency to herd, resist ongoing momentum. Now in 2016, the news on Brazil is related to chaos, Zika, corruption, collapse, scandal, poor forecasts, junk rating etc. A few ETF players are even touting the idea of buying inverse (negative) Brazil ETF’s.
What should be done if positive stories come near tops and negative stories generally come late? The news moves from relevance to irrelevance and vice versa. Efficient market theorists suggest just buying the market without worrying about the news. While inefficient market theorists suggest that timing is impossible hence buying fundamental value is the best approach. The inefficient school is a bit unclear about what the portfolio approach should be. Moreover, what is value in commodities and fixed income is tough to determine.
Where does this leave the investor? What should his portfolio approach be? What kind of insight could help? The global investor can avoid a few mistakes which can assist him in allocation. First; he has to look at various markets and not remain local. The more local, the more underdiversified, the riskier the portfolio. Second; the global investor should compare asset performances over longer durations.
For example, since 1998, Nikkei has outperformed Bovespa only once on a 3 year (12 quarter) basis. The Nikkei relative outperformance (RP) vs. Bovespa started in September 2012 and lasted until December 2015. In this period, Bovespa fell by 20% while Nikkei increased by 92%. Divergences of long-term duration are prone to reversion. A 100% difference between the Nikkei and Bovespa is an extreme divergence which would be more interesting to monitor than the short term clueless news, which has no idea what is junk and what is not.


News
BM&F Bovespa sees trading record in 2009
How to Profit from Brazil’s Coming Economic Collapse