An Alternative Way to Play the Brazilian Real

Inflation fears and a softness in Brazilian markets have driven down the value of the Brazilian real versus the U.S. dollar as part of a general slide in Brazilian equities. Those wanting to bet on a recovery of the Brazilian real have a handful of options: a fairly standard currency ETF, a Brazilian market ETF, and -- perhaps the most interesting -- a Brazilian airline.

ETF choices
While some investors prefer FOREX-style currency trading, many others would rather trade currency similarly to how you trade stocks. For these investors, the WisdomTree Brazilian Real Fund (NYSEMKT: BZF  ) offers exposure in the form of an ETF. The ETF is down substantially since 2011, reflecting weakness in the real. Daily volume is pretty low at about 24,500 per day, but this ETF is one of the few ways for investors to get direct exposure to the real. Those looking for higher-volume alternatives should read on.

The iShares MSCI Brazil Capped ETF (NYSEMKT: EWZ  ) offers exposure to the real through its selection of Brazilian stocks. With this option, investors take on the risk of the Brazilian stock market but are also rewarded with a dividend yield of 3.2%. As a bonus, this ETF attracts a much wider audience than just Brazilian real traders, giving it a much higher volume of about 18 million per day.

As I mentioned before, Brazilian stocks are well off their highs, making EWZ far cheaper than it was several months ago. This ETF allows investors to benefit from a recovering Brazilian equity market; but due to its holdings of Brazilian stocks and not just the real, it is not a pure play on the real.

Airline
Typically, airlines are investments almost purely in air travel, of course. However, Brazilian carrier Gol Linhas Aereas Inteligentes (NYSE: GOL  ) has major exposure to the Brazilian real as part of its business model. As a carrier operating primarily in Brazil, Gol's revenues are almost entirely in Brazilian reals. But Gol still uses jet fuel, where oil is denominated in U.S. dollars; aircraft leases are also U.S. dollar-denominated.

It's not difficult to see how Gol's fortunes change dramatically as the currency moves. When the real drops, obligations increase but revenues do not. Conversely, when the real rises, obligations decrease, while revenues remain constant. Unfortunately for Gol, the former has been happening more lately. Shares fell from around $7 in January to less than $3 in July as the real slid 10% from $0.49 USD to $0.44 USD. The real slid to less than $0.41 USD at its low, but shares of Gol had already bottomed and managed a slight recovery.

The story for Gol has improved in the last week as the Brazilian government has hinted at further action to strengthen the real in the wake of its slide. The real has rebounded to around $0.44 USD as of this writing, and Gol shares have moved higher along with it. Trading in the mid $3 range in late August, Gol has staged an impressive rally, having broken through the $4 level and continued past $4.70. If the real continues to recover, Gol could be in for a near-term rally as investors focus on the airline itself and less on currency concerns.

But Gol is far from a pure play on the Brazilian real. Gol shares come with the risks and rewards of investing in an airline, including economic and competitive factors. The airline industry has rallied as a whole over the past year, with most outperforming the market and shares of a few major carriers doubling in value. Gol has substantially underperformed both the airline industry and the market. If the Brazilian economy begins to take off again, Gol stands to benefit both on the currency and cyclical sides.

Analysts generally have a positive view of Gol, setting price targets well above current levels. Imperial Capital commented on Gol in July, setting a $6 price target and citing Gol's turnaround plan. As part of the plan, Imperial sees benefits from the elimination of Boeing 737-300 aircraft and headcount reductions of almost 2,000. Imperial also sees strength in Gol's fares, saying the airline has "focused its efforts on moving its average fares up, no longer relying on fare cutting as a traffic generating tool." Raising fares is important to airline earnings and has been a major source of bullishness in the U.S. airline market as investors warm to the idea of higher fares instead of intense competition. If Gol can demonstrate a major turnaround, it could enjoy the same investor bullishness seen in the U.S.

Real investing
Many companies are affected by currency fluctuations, but Gol is among the most exposed in the Brazilian market. With obligations in U.S. dollars and revenue in Brazilian reals, shares of Gol are a bet both on the airline and on the strength of the real versus the dollar. Investors not comfortable with owning an airline may want to consider a Brazilian real fund like WisdomTree's or more diversified Brazilian equity exposure via an ETF like the iShares MSCI Brazil Capped ETF. For what it's worth, I plan to hold my shares of Gol while monitoring both the operational side and the currency side.

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