Buy Brazil. I Am

Macro piece on the most asymmetric market today...

China has re-rated, ASEAN has re-rated, so where is the ‘no-brainer’ market now that fiat is dead (see Gold) and everything is melting up? You didn’t read that wrong - it’s Brazil. A market that no one has made money in, perennially un-investable and where inflation and politics often go bananas.

Nothing excites me more than an un-investable universe (at the cusp of inflection). My investment framework is all about identifying a confluence in macro and micro for high probability set-ups, as it reduces the opportunity cost of sitting in a deep value position that eventually transitions into a momentum play.

Brazil offers great asymmetry on a 1-3 year view, and is the only market globally at the intersection of 2 significant catalysts – (1) Normalisation of real rates and (2) Election/socialist regime change; with a fat right tail should the election outcome pan out favourably and herald the return of a pro-business environment, whereby subsequent return of investor confidence in a long neglected market would drive reflexive capital inflows over a 3+ year horizon.

Asymmetric Option Value of Brazil relative to other EMs

Looking back at history, dollar weakness has historically been highly stimulative for emerging market growth given the cross-asset dynamics: EM currencies can be viewed as commodity currencies (given majority are natural resource exporters) where typically weak dollar = strong gold & commodities = relatively stronger EM currency and capital flows into locally priced assets.

Thus, performance of EMs in general are inversely correlated with the dollar as seen below (oscillating between 6-10yr regimes since 1985).