We’re quickly approaching the August 5 opening ceremony for the 2016 Summer Olympics. That means there’s less than two months for Brazil, which is this year’s host country, to finalize everything, including a much-needed subway system.
In truth, Brazil is hitting a perfect storm of bad news right now. First, the sell-off in oil prices and other commodities has put pressure on a country that is commodity rich. Then there’s the fact that various top corporate executives and government officials have been caught up in corruption and money laundering accusations.
Lest we forget, there’s the Zika virus overhang, which has put a damper on the entire idea of going to Brazil. Zika has led world leaders to speak out about traveling to Brazil, and even Olympic athletes are debating the idea of participating in the games.
Just under a year ago, I highlighted the three must-sell Brazil stocks that had too much Brazil exposure. All three of these stocks are down over the last year, with the worst performer being Owens-Illinois Inc. (NYSE: OI), which has seen its shares fall 24% over the past 12 months.
Now, with a potential catalyst on the horizon – the Olympics – it is time to circle back around and see if there are any value plays today. In particular, has all this bad news created a buying opportunity for certain Summer Olympics stocks?
Beer Continues to Flow
Despite all the shadows looming over Brazil this summer, an underrated play is Ambev SA (NYSE: ABEV). This Brazilian maker of beer and other beverages is a subsidiary of Anheuser-Busch InBev (NYSE: BUD).
By volume, Ambev is the largest brewer in South America, with Brazil accounting for over half its sales. Regardless of the broader economy, people are going to drink, especially at the Summer Olympics.
Ambev also pays a dividend, which varies based on the conversion rate from Brazilian reals to U.S. dollars. But based on its last dividend payment, Ambev is yielding roughly 2.3%. It has also paid dividends for over 12 years.
But digging even deeper, if you want to try and capitalize on the massive sell-off of Brazilian stocks, it might be best to do so with an ETF, which is more diversified.
A Fund Choice
The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is the biggest Brazil-focused exchange-traded fund, but it has lost nearly half its value over the last three years. Ambev SA is the ETF’s largest position; it makes up over 10% of its holdings.
When it comes to investing in the more broadly diversified ETF, the key is there is no overnight fix for the Brazilian economy. It’s in the worst recession in more than 100 years and investments like the EWZ fund are long-term plays for patient investors.
That’s not to say that things aren’t looking up for Brazil, even if it is modestly. Economic growth, as measured by gross domestic product, was down 0.3% in the first quarter on a quarter-over-quarter basis. This came in better than the expected 0.8% decline and topped the 1.3% fall from the fourth quarter.
The better-than-expected GDP figure could mean that the recession has already bottomed, likely in the second half of last year. Let’s not forget that the change in government is still a big catalyst. The Brazilian stock market was the third-best performer in the world during the first four months of 2016, thanks to the renewed optimism of the new government, new budget and new growth plans.
In the end, if you’re looking for a deep value opportunity in emerging markets, investing isn’t about timing the markets. Rather, prudent investors see an opportunity and take a diversified approach to capitalizing on the opportunity. A bet on Ambev or the more diversified EWZ fund could fit the bill.