When we warn you that investing in emerging markets is risky, we mean it.
It’s hard enough keeping tabs on looming threats to profits and share prices here in the U.S., even with an abundance of press and analyst coverage.
It’s even harder when you’re thousands of miles away and information in your native tongue is scarce.
That goes double when you’re trying to cherry-pick among individual emerging-market stocks. Making narrow sector or country bets through ETFs is risky enough, but at least that offers some diversification.
Stockpicking among emerging-market ADRs? Well, that’s just asking for trouble.
Exhibit A is CEMIG (NYSE:CIG), the biggest Brazilian electric utility trading on the U.S. market. CIG’s ADRs plunged more than 20% Wednesday on the New York Stock Exchange after the Brazilian government said it’s forcing utilities to cut rates.
Maybe you’ve never heard of CEMIG, but make no mistake: This is a big, liquid stock. More than 25 million shares traded hands midway through the session, or 13 times average daily volume. And even after the rout, CIG’s market cap still stood at $10.4 billion. Importantly, it also accounts for about 1.6% of the popular Brazil ETF, the iShares MSCI Brazil Index Fund (NYSE:EWZ).
So what the hell happened?
Last we heard, the company posted strong quarterly results a month ago and remained an analyst darling. Indeed, Marcos Severine, an analyst at Itau BBA, followed up CIG’s August earnings with a report saying the stock remains his top pick in the utility sector because it provides the best combination of defensive features and growth options.
CIG was doing great. It was up nearly 40% year-to-date after the company’s mid-August earnings report.
But then regulatory risk and uncertainty pulled the plug on the high-flying electric company.
Regulatory risk is an ever-present overhang for investors in U.S. utilities stocks, and it’s an even bigger concern in places like Brazil, which has a different take on government’s role in the economy.
State ownership, direction and intervention should indeed get plenty of credit for helping produce the Brazilian economic miracle. But it also means investors have to realize they’re dealing with something quite different from what we think of as U.S.-style free markets.
Brazil’s once red-hot economy has cooled off to the point of almost reaching stall speed. Among its policies to boost growth, the government of Dilma Rousseff is committed to lowering costs on manufacturers and businesses. To that end, the president said Tuesday that Brazil will force electric utilities to cut rates, which by some measures are among the highest in the world.
The takeaway for individual investors is, as always, “buyer beware.”
Holding individual ADRs in companies located far overseas, subject to their own macro and regulatory risks — and a paucity of U.S. business press coverage — can leave you flying blind.
A week ago, CIG was up about 25% for the year-to-date. Today, it’s down 12% for 2012.
Does that make CEMIG a buy at current levels? I don’t know. I can’t read Portuguese.
As of this writing, Dan Burrows held no positions in any of the aforementioned securities.