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Brazilian ADRs Don’t Have a Tariff Problem

While the U.S. and China have been playing tariff tug-of-war, Brazil has experienced a quiet resurgence. And Brazilian ADRs have been on a tear.

The trade war between China and the U.S. has reached a fever pitch. This week alone, the Trump administration put out a list of 1,300 Chinese exports that will be subject to 25% tariffs. In response, China will impose tariffs on $50 billion worth of U.S. imports, ranging from soybeans to various chemicals. The escalating trade tension between the two global mega-powers has been bad for both countries’ stock markets. Meanwhile, Brazilian stocks - and Brazilian ADRs - are surging.

With Donald Trump’s trade wrath focused almost exclusively on China, Brazil has been mostly out of the headlines, at least here in the States. For a country that has made the wrong kind of headlines in recent years—political dysfunction, corruption, its worst recession in history—no news has been good news for Brazilian stocks.

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The Bovespa, Brazil’s benchmark stock index, was up more than 21% from December through February, rising to all-time highs while other world stock markets were cratering (see chart below). Though they retreated in March, Brazilian stocks are still up 17% through the first three months of 2018—a stark contrast to the 2.8% drop in the S&P 500 and the 5.3% decline in Chinese stocks.

Brazilian stocks have been on a tear since December - and so have Brazilian ADRs.

A return to growth for Latin America’s largest economy has certainly helped. Brazil’s gross domestic product (GDP) has expanded in four straight quarters. And while growth has been small (+0.55% per quarter), economic growth of any kind is a welcome improvement after a two-year recession.

Combine a growing economy with a lack of trade-war angst, and Brazilian stocks look like a nice refuge from all the turmoil plaguing larger markets.

It’s no coincidence, then, that Paul Goodwin, our resident emerging markets expert, recently recommended a Brazilian stock in his Cabot Global Stocks Explorer advisory. It’s an upstart company with an increasingly global presence, and one that has grown sales and earnings by triple digits in each of the last five quarters, including 350%-plus top- and bottom-line growth in the fourth quarter of 2017.

To capitalize on that blockbuster growth, the company came public in January, and the stock is already up 30% from its IPO. Like other Brazilian ADRs, the stock is available on a U.S. exchange.

To learn the name of this mystery Brazilian ADR, and why Paul called its business proposition “genuinely disruptive,” you can subscribe to Cabot Global Stocks Explorer by clicking here.

For years, the Brazil stock market was virtually untouchable, with the term BRICs (referring to Brazil, Russia, India and China) all but vanishing from the vernacular as a term for the four pillars of emerging markets growth. Thanks to Vladimir Putin, I still wouldn’t buy Russian stocks under any circumstances. But Brazilian stocks, in tandem with the Brazilian economy, are experiencing an unexpected resurgence.

With markets in the U.S. and China in the throes of severe corrections—and perhaps worse—Brazil has become an improbable alternative for investors who don’t mind a little risk.

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Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.