FUNDQ&A-Brazil ADRs may bounce on inflows tax-Cozad

NEW YORK Oct 22 (Reuters) - Brazilian company shares traded in the United States could see a short-term boost after the country imposed a tax on capital inflows, a portfolio manager who focuses on American Depositary Receipts said.

Bryant Evans, who manages the international equity income portfolio at Cozad Asset Management in Champaign, Illinois, said the strength of the Brazilian economy is more important than the new 2 percent tax on foreign investment in equities and fixed income. For details on the tax and market reactions, see [ID:nN20443536].

Evans manages an ADR-only portfolio of about $10 million; Brazilian ADRs make up about 10 percent of that. Cozad has about $500 million under management.

Evans said the portfolio is up 44 percent through the end of September. It is benchmarked to the FTSE all-world index ex-US, which is up 32 percent in that period.

The Bank of New York Mellon Brazilian ADR index .BKBR rose 89 percent in the same period, while the Bovespa index .BVSP was up about 64 percent.

The new Brazilian tax aims at curbing the strength in the local currency, the real BRL=, which has surged about 35 percent so far this year.

As a result of the tax, there is concern investors will shift direct investments in the Sao Paulo exchange to the U.S. dollar-denominated ADRs traded in New York. For an interview with the chief executive of the Sao Paulo stock exchange see [ID:nN20209635].

Currently, some of the most active stocks on the New York Stock Exchange are Brazilian ADRs. Mining company Vale (VALE.N) and energy giant Petrobras (PBR.N) were among the most active by dollar value on Wednesday, both trading more than $900 million in shares.

Following is a Q&A with Bryant Evans, portfolio manager at Cozad. Q: What trading opportunities arise from the Brazilian government's new tax on foreign inflows? A: Brazilian ADRs theoretically should get a short-term pop. It could be that some investors shift to the ADR side instead of trading on the Bovespa [the Brazilian stock market].

I think (the tax) is small enough not to affect long term investors, but it affects day traders. They are trying to decrease short-term speculation in their markets.

I am pleased to be overweight in Brazil right now. It is a good place to invest because of the kinds of companies that offer ADRs.

There are some concerns over Brazil, and the strong real is one. But I like it because commodities and agricultural products are going to be strong in the next 12 months and beyond. Q: Are there added opportunities through arbitrage? A: Maybe. ADRs roughly track the performance of the domestic stock. If there is a short-term blip where foreign investors are bidding up the price of an ADR, arbitragers may go in and both short the ADR and long the domestic security and take advantage on the next day's correction and discrepancy. Q: How does this move by the Brazilian government change your strategy? A: It doesn't change the big-picture strategy. But if there is a strange tick up, if Brazil grows too much, there could be some selling to rebalance the portfolio.

In the long run I also think Brazil would decrease or cancel the tax. I don't think this will tackle the strong real. And people will still find windows of opportunity to avoid the tax. Maybe ADRs are a way of investing in a U.S. company with heavy Brazilian exposure. Q: With the widespread U.S. dollar weakness, what happens if other countries follow Brazil's example? A: In the short run ADRs may get a pop out of it, too.

In the long run, a lot depends on the net effect of the tax on those country's economies.

If taxes stay for the long term, inefficiencies may become a problem. Any time you throw a wrench to an economic system, when governments tamper with the economy, they don't know the net effect in the long run. It is like introducing a new animal to an ecosystem. (Editing by Padraic Cassidy) ((rodrigo.campos@thomsonreuters.com; + 1 646-223-6344; Reuters Messaging: rodrigo.campos.reuters.com@reuters.net))