A bet on Brazil's bright future

Another week brings another wild ride in the Middle East. Markets are still taking the swings far more calmly than almost anybody would have expected a few weeks ago. There's more volatility below the headlines when you look at which sectors are doing well or poorly, but the fact that global stocks are broadly unchanged since America and Israel first attacked Iran seems increasingly hard to understand.

One possibility is that investors remain optimistic that the crisis will pass and everything will go back to the way it was before. That is plausible, but becomes less likely the longer the disruption goes on. The second is that many people suspect that this is an inflexion point, geopolitically and economically, but feel that the long-term implications are still unclear. If so, it may be more sensible to do little and wait and see, rather than overreact wildly.

Brazil could prove to be a winner

So who, potentially, are the winners? The crisis will increase the focus on energy security, which should support commodity prices (short-term) and resource investment (medium-term). At a top-down level, maybe this will be good for Brazil. Yes, this is an economy with a long history of unfulfilled promises, but it is one that has done very well in previous resource booms.

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Brazil's market is up strongly over the past year, but has not moved much in this crisis. On a forward price/earnings ratio of ten, it is not as cheap as it sounds (a cyclical economy should trade on low valuations), but it is not expensive. Brazil's economy is not immune to higher energy costs – diesel and fertiliser prices are rising – but very high use of biofuels should help insulate it to some extent. I am considering buying the Xtrackers MSCI Brazil ETF (LSE: XMBR).

What about the losers?

The crisis may accelerate the decline of the US dollar as the global reserve currency. The assumption is that this will be a gradual process given how embedded the dollar is in the global financial system – but we should remember that ruin often happens “gradually, then suddenly” in the words of one of Ernest Hemingway's characters.

Fewer foreign buyers for US Treasuries does not mean that America must go bankrupt – I do not think there is any likely way that America will default, other than stupid political theatrics around the nonsensical debt ceiling. However, the choices that it might one day have to make to avoid bankruptcy probably point either to much slower growth or higher inflation.

More broadly, it is hard to guess at this point what the implications are if the US dollar loses its unique status. A global financial system that no longer uses the dollar – and by extension many American companies – as the lynchpin of so many transactions could look very different. To take just one speculation, I hold Mastercard and Visa in my portfolio – I wonder how vulnerable they could be to potential efforts to decouple the world from America.

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