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Brazil!

(Brazil fans. Wikipedia)

Amid yesterday’s carnage for the iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ), I talked about my long position. Today we seem to be getting a bounce.

Seems like a good time to try to talk back-of-envelope valuation for Brazil. We can start with Star Capital’s global valuation ratios. As of March 31, Star assigned Brazil a CAPE of 10.7, toward the low end of global stocks. EWZ traded at $37.46 at that time. At today’s price of around $32.75 and assuming that 1Q earnings didn’t dramatically affect the metric, I get a CAPE of 9.4 for EWZ. That’s not super cheap, but it infers a CAPE “earnings yield” of 10.6%, good enough not to sell. The implied CAPE earnings yield reaches 15% at $23.20 and 20% at $17.40. Those are prices where adding new money might start to make sense for me.

How about relative to GDP?

Warning: This is rough, guesstimate type work.

The World Bank pegs Brazil’s market cap to GDP ratio at 23.2% for 2015. At that time, the market cap was $759 billion, inferring a GDP of $3.3 trillion. The U.S. market cap is at 138.9% of GDP. The IMF puts Brazil’s 2016 GDP at 97.7% of 2015 levels. EWZ was at $26.90 on May 20 of 2016. It’s now at $34.75, 29% higher. Assuming EWZ reflects total market cap and that the trailing GDP numbers are useful, I get today’s market cap to GDP of 31%. As this chart shows, that’s low relative to historical levels and not bad relative to the U.S. On this very rough sketch, Brazil doesn’t seem overpriced.

Investments can be cheap for good reason. For instance, we learned yesterday that Brazil’s stock market can fall very far, very fast. Nothing in these two valuation metrics suggests that we’re safe from further downside, but I’m willing to take that risk given my multi-decade time horizon.

By the way, Star Capital pegs Russia’s CAPE at 5.3 as of March 31. At that time, the iShares MSCI Russia Capped ETF (NYSEARCA:ERUS) was at $32.12. It’s now at $31.05, so not much different. I bought ERUS today,…

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