A Bet On Brazilian Banks

My skepticism of Chinese banks notwithstanding — whether in Brazil, Korea, India or Austria — investing in banks that provide the loans, credit cards and mortgages to the emerging middle classes is one of the best and safest long-term bets around. Look back at the five and ten year charts of almost any "top three" bank in a fast-growth emerging economy and you’ll find several five and ten baggers.

This week’s Global Bull Market Alert pick is in the banking sector in Brazil. Two of the top five holdings in Templeton’s Emerging Markets Fund — a long-term, value-oriented fund — are also Brazilian banks. But here’s why I think Unibanco (UBB), the third-biggest bank in Brazil, is also a terrific short-term trading play.

First, Unibanco’s fundamentals are strong and improving. In the first nine months of 2006, its net income was up 22.9%, its average equity reached 24.8% and its efficiency ratio improved from 52.5% to 48.5%. Those numbers are impressive by any bank’s standards.

Second, trading at a P/E of about 10.8, Unibanco is the cheapest among its Brazilian rivals. More importantly, its Price Earnings to Growth (PEG) ratio is .94. That means you’re getting a bargain, based on its future projected growth. A PEG ratio of < 1 is a screaming buy.

Third, Brazil is the most overlooked, under appreciated and cheapest of the BRIC countries. Ironically, Brazil has never had its economic house in better order. It’s paying off its debts. Inflation is at its lowest level in decades. And Brazil’s currency has appreciated by 65% against the U.S. dollar since the end of 2002, giving U.S. dollar investors a strong boost to their returns.

Finally, 2007 just might be Brazil’s breakout year. It’s off to a good start. The Bovespa — Brazil’s stock exchange — broke through the 45,000 level for the first time yesterday on the news that Brazil’s foreign trade surplus in 2006 reached a record $46 billion.

A word of warning, though. Brazil is traditionally one of the world’s most volatile markets. It sells off quickly (and steeply) during inevitable hiccups. Historically, Unibanco’s stock has been about twice as volatile as the overall U.S. market. But investors who have held on during the inevitable periods of volatility in Brazil have been richly rewarded.

So buy Unibanco (UBB) at market today, and place your initial stop at $83.00. For potentially even bigger short term gains, buy the April $95 calls (UBBDS.X).

PORTFOLIO UPDATE

China Life (LFC) continues to roar ahead, closing up almost 7% in Hong Kong yesterday. Expect it to open strongly in New York as well today. The company also announced a rather confusing stock split of 8:3. That means for every 3 shares of China Life you owned, you now own 8. Move your (split-adjusted) stop to $45.75.

The China ETF (FXI) jumped 6.6% last week, and the options are up over 55%. Move your stop to $105.80. The Austrian ETF also jumped 2.6%. Move your stop to $35.25. The Swedish ETF was up 1.2%. Move your stop to $30.80.

All of our current positions are profitable. Thanks to our huge gains in Millicom (MICC- up 54.56%) and China Life (LFC- up 63.44%), our average stock gain stands at a whopping 24.86%