A year to forget for Brazil isn’t over quite yet, as more bad news
has hit the huge South American nation. This time, the weakness
comes from the latest GDP report from the country, which was quite
poor.
In the report, Brazil revealed that its GDP actually contracted for
the most recent quarter (compared to Q2), posting a decline of
-0.5%. This was lower than the -0.3% slump predicted by a Bloomberg
survey of 38 economists, according to the Financial Times.
The key areas of weakness in the country came from a big slump in
agricultural output, which tumbled by 3.5% (q/q), while industry
and services were a bit better, showing tiny gains for the time
period. Troublingly for the nation though, investment also fell, by
2.2%, suggesting that some are abandoning the country as a
destination for capital (also see Brazil ETFs Crushed by Downgrade,
Currency Woes).
Given this struggling growth, many might think that a rate cut is
in order for the nation. However, with a recent hike to 10% and
inflation at nearly 6%, this isn’t really an option, suggesting
that the central bank and government officials are kind of stuck
for the time being, and that more trouble might be ahead for
Brazil.
ETF Impact
As you can imagine, this news has led to some poor trading for the
many ETFs tracking Brazil. The gold standard in this corner of the
ETF world continues to be the
iShares MSCI Brazil Index
Fund (EWZ) and this product tumbled after the report on
GDP was issued.
This also continues the terrible trend for EWZ for pretty much all
of 2013, as the product has lost more than 20% in the time frame.
Much of these losses came when the taper discussion first came to
the forefront in the U.S., but the recent rate hike and growth
concerns are threatening to send the fund into another run
lower.
However, it is also worth noting that the slide in shares has hit
other aspects of the Brazilian ETF market as of late too,
suggesting that other types of securities are by no means immune to
what has been happening in the country (see all the Latin America
Equity ETFs here).
The
Market Vectors Brazil Small Cap ETF (BRF), for
example, which targets pint-sized firms in the nation, has lost
over 31% on the year, while
EWZS has also tumbled
by more than 30% in the YTD time frame. Sectors have also been big
losers in the time period, with the
Global X Brazil
Financials ETF (BRAF) and the
Global X Brazil
Consumer ETF (BRAQ) losing more than 20% each as well
year-to-date.
Clearly, no segment has been spared and losses have been pretty
widespread across the country. And given the slump in GDP and the
lack of foreign investment—a situation which could continue if
there is a taper in the U.S. QE program—it is hard to get too
excited about Brazil in the short term.
For this reason, our view on Brazil ETFs is still pretty negative
for the most part. EWZ currently has a Zacks ETF Rank #5 (Strong
Sell), while BRF has a Zacks ETF Rank #4 (Sell), suggesting that
these are likely to underperform their emerging market counterparts
in the near term (see all the top ranked ETFs here).
Bottom Line
The situation in Brazil has been pretty terrible and there is
little hope for gains in the months ahead. However, given the
increases in government spending and the huge need for
infrastructure for the coming World Cup and Olympics, a look to a
Brazil infrastructure ETF might be an interesting idea.
There is one such ETF that has this focus, the
EGShares
Brazil Infrastructure ETF (BRXX). This overlooked ETF,
which is in my personal portfolio, is certainly not the most
popular fund out there—nor is it the cheapest at 85 bps a year—but
it could be an interesting and concentrated play on one of the few
segments of Brazil that could have some promise in 2014 (see the 4
Best New ETFs of 2013).
The fund has fallen like the rest of the Brazil group lately, but
with all the spending still coming, and if the Brazilian government
needs to do more in order to pick up the slack in the economy, this
could be a top sector to focus on.
So if you still want some exposure to Brazil, BRXX might be a
slightly better play at this point— it also has a Zacks ETF Rank #3
(Hold)—though it is clearly a tumultuous and risky environment
across the board for the nation in the short term.
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Author is long BRXX.
GLBL-X BRZL FIN (BRAF): ETF Research Reports
GLBL-X BRZL CON (BRAQ): ETF Research Reports
MKT VEC-BRZL SC (BRF): ETF Research Reports
EMERG-GS BRAZIL (BRXX): ETF Research Reports
ISHARS-BRAZIL (EWZ): ETF Research Reports
ISHARS-MS BR SC (EWZS): ETF Research Reports
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