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Why Brazil Could Be a Great (Commodity) Investment - Stock Picks
The Commodity Report #122
Brazil & the Commodity Wonder
At Kuemmerle Research I have to observe Brazil closely as it is one of the most important commodity markets in the world. This brings us also to this week’s investment case - Brazil as an investment because of its rising commodity productivity.
According to CONAB (Brazilian equivalent to the USDA) grain production in Brazil for the 2022/23 harvest is expected to register a record production of 322.8 million tons, corresponding to growth of 18.4% or 50.1 million tons increase over the previous season. Brazil has been breaking records of grain production year after year on a consistent basis over the last decades due to both increased productivity and larger planted area.
Because of agribusiness, Brazil will likely have close to 3% GDP growth in 2023 according to analysts, while economists were expecting a number under 1% at the beginning of the year.
The planted area, estimated at 78.5 million hectares, is 5.3% or 3.9 million hectares higher than that seeded in 2021/22. The largest increases are observed in soybeans, with 2.58 million hectares or 6.2%; in corn, with 686.8 thousand hectares or 3.2%; and wheat, with 364,300 hectares or 11.8%.
At the start of the year, the market consensus was that consumer inflation was going to be around 6%. Especially because of lower food inflation, economists now expect inflation to be lower than 5%.
As most of the Brazilian harvest is exported, the country should also have a record-breaking positive trade balance this year. UBS expects the trade balance to reach a USD 80 billion surplus in 2023, or almost USD 20 billion more than last year’s record.
So while the commodity tailwind is good for the Brazilian economy - stocks should benefit from that trend in the long-term, right? Well, so far they didn’t.
According to MacroOps Brazil’s relative PE to MSCI Emerging Markets trades near a historical discount to the index.
That’s also because the MSCI Brazil underperformed the broader MSCI EM index for over a decade. While the ten-year annualized return for the EM Index is at 2,99% - the one for the MSCI Brazil is at only 1,76%. But the fundamentals seem to change - the country is able to decrease its deficit spending via more and more commodity exports.
At Kuemmerle Research we don’t trade equities or recommend any setups except commodity futures, but looking at the most liquid and important stocks - there are a few names to look at besides the broader Brazil index.
Those are the top 10 holdings of the index at the moment. As you can see the index is very much commodity/financials driven. Because of the commodity investment case - we would like to focus on commodity stocks.
From a simple chart-analysis perspective, there are a few stocks we would call “interesting”.
VALE - the mining company has been in an uptrend since 2015 and is currently in a two-year-long consolidation. A breakout in trend direction over the next couple of months seems likely.
PETROBAS - the state-owned energy company specializes in oil, natural gas. A close above 17 USD would open up the door for a major breakout.
GERDAU - Gerdau is the largest producer of long steel in the Americas, with steel mills in Brazil and many other South American countries. A close above 6,50 USD would open up the door for a major breakout.
Some other exotic picks from us:
BrasilAgro ($560 million market cap) engages in the acquisition, development, exploration, and sale of rural properties suitable for agricultural activities in Brazil. The company provides major dividends (currently 17%) and the stock price is quite stable over the past eight years or so.
Sao Martinho ($3 billion market cap) operations include the production and marketing of sugar, ethanol, electricity and other products from sugarcane. The company is currently a major beneficiary of the fast rising sugar prices.
SLC Agrícola ($1,85 billion market cap) is one of the largest Brazilian agricultural producer. It focuses on cotton, soybean, and corn. The Company's activities are divided into two business segments: Agricultural production and Land portfolio. The Agricultural production division focuses on developing plantations of various crops, such as cotton, soybean, corn, wheat, coffee, sorghum, sugarcane and sunflower. The Land portfolio division is responsible for the acquisition and development of land for agriculture.
FED Funds Rate Leads Stock Market Volatility
UBS warned clients this week that the FED Funds Rate is leading the VIX by roughly two years. Applying this to the S&P - the company makes the case that the broad stock market could be due for a larger correction at the beginning of 2024. (The FED started its recent hiking cycle back in March of 2022)
Farmer Sentiment Remains Low
U.S. farmers’ sentiment weakened in August compared to July as the Purdue University-CME Group Ag Economy Barometer dipped 8 points to a reading of 115.
This month’s decline was fueled by producers’ weaker perception of current conditions both on their farms and in U.S. agriculture as the Current Conditions Index fell 13 points to a reading of 108. The Future Expectations Index also declined in August to a reading of 119, 5 points below a month earlier.
Six out of ten farmers in this month’s survey said they expect interest rates to rise over the next year which, along with rising prices for farm machinery and new construction, was cited as a reason for a weaker investment climate. Despite concerns about rising interest rates, producers remain cautiously optimistic about farmland values in both the short-run and longer-term.
This week look out for the following:
German ifo Business Climate on Monday
Richmond Manufacturing Index and New Home Sales on Tuesday
Durable Goods Order on Wednesday
Fed Chair Powell speaks on Thursday
Core PCE Price Index and Chicago PMI on Friday
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Till next Monday, Lukas