Bullish on Banking in Brazil

This week’s Global Bull Market Alert pick adds Brazil’s financial giant Itaú Unibanco Holding S.A. (ITUB) to your portfolio. Here’s why I think Brazil’s banks — and in particular ITUB — will perform well over the coming months.

First, banks are the best “big picture” bet on the rapidly rising middle class in Brazil. The country’s middle class today stands at 49% of the population. That’s up from just 39% in 2005. And a rising middle class ensures that Brazil’s banks will benefit from improving credit quality and falling delinquency rates in both individual and commercial loans. Goldman Sachs estimates that loan growth in Brazil likely will expand at a compound annual growth rate of 25% over the next three years.

Second, contrary to their former reputation, Brazilian banks are quite robust and held up better during the financial crisis than their foreign counterparts. After all, Brazilian banks had gone through their financial crises over the past 20 years, and learned their lessons well. That’s why they never took on the excessive leverage that brought U.S. and Western European banks to the brink of collapse.

Third, Brazilian banks are cheap. Even after rising sharply in the past weeks, Itaú Unibanco Holding S.A. is trading at a forward P/E of only 11.78, making it one of the cheapest banks in fast-growth emerging markets — and much better value than its Indian or Chinese counterparts. No wonder Goldman Sachs just upgraded Itau Unibanco to a “buy.” Itau Unibanco Holding S.A. also is announcing earnings this week on Aug. 4. When rival Banco Bradesco announced better than expected earnings on July 28, its shares jumped 4.5%. I expect a similar move in Itau Unibanco’s shares.

So buy Itaú Unibanco Holding S.A. (ITUB) at market today, and place your stop at a relatively tight $20.00. For even bigger potential gains, I recommend the January 2011 $22.50 call options (ITUB110122C00022500).

Portfolio Update

iShares MSCI Chile Investable Mkt Idx (ECH) hit a record high of $63.83 last Tuesday. With risk appetite returning to global markets, this relatively low volatility pick is a BUY.

iShares FTSE/Xinhua China 25 Index (FXI) managed to end the week slightly down, confirming my bearish bias. Nevertheless, with global markets rallying, this bet against China is a HOLD.

Global X/InterBolsa FTSE Colombia 20 ETF (GXG) rose to a record $38.72 on Tuesday, before pulling back slightly. With Colombia’s financial sector on fire, GXG is a BUY.

Market Vectors Indonesia ETF (IDX) hit a record high of $77.75 on Friday, confirming its position as the strongest-performing market in Asia this year. IDX remains a BUY.

iShares MSCI Thailand Investable Market Index Fund (THD) broke out to a record high of $50.30 on Friday, gaining a quick 1.2% in its first two days in the portfolio. THD is a BUY.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.