Brazil ETFs: More Trouble On the Horizon? - ETF News And Commentary
July 16 2012 - 6:45AM
Zacks
2012 started on a strong note for the emerging economies but
many of them have been hit recently by slowdown concerns. Of the
giant BRIC nations, Brazil seems to be the worst hit.
Brazil had benefited immensely from the decade long commodity
boom but growth seems to have stalled now mainly due to slowdown in
its major export destinations. (Read: Three Excellent Dividend ETFs
for Safety and Income)
According to the latest survey of economists by the Brazil’s
central bank, the GDP will grow at a rate of just 2.2% this year.
Last year the economy grew at 2.7%, down sharply from 7.5% growth
in 2010.
The central bank began cutting rates in the second half last
year and now the key Selic rate is at a record low of 8%, after a
series of eight rate cuts. With inflation touching a two-year low
of 4.9% in June, the central bank still has room to lower the rates
further. (Read:The Five Best ETFs over the Past Five Years)
Apart from the rate cuts, the authorities in Brazil have taken
several other measures to stimulate the economy and boost domestic
demand. As a result of massive efforts, unemployment has remained
low and consumer demand continues to be strong but the
infrastructure and investment continue to suffer.
As a result of low unemployment rate (~6.0%), a rising middle
class and generous pay increases (wages are indexed to inflation
and GDP growth), the domestic demand has continued to grow.
The property prices have skyrocketed and auto sales have boomed
in the Latin America’s biggest economy, due to easy access to
credit. Credit as a percentage of GDP has doubled to about 50% in
last ten years. However, rapid credit expansion has resulted in
rising non-performing loans. Consumer default rate rose to 8% in
May (30-month high).
Though as of now, non-performing loans are not a big concern for
banks’ health as the Brazilian banks are well capitalized and
unemployment remains low, but their rise signals caution. (Read:
Forget T-Bonds, Invest in These Top Corporate Bond ETFs)
With about 20% of Brazil’s exports headed to the Euro-zone and
about 18% to China, the export demand will continue to be weak in
the coming months.
The stock market index Sao Paulo Bovespa is down 4.3% due
to slowdown fears and the Brazilian Real is down about 9% against
the US Dollar (partly due to the currency war waged by the
government), in 2012.
In view of the circumstances, we do not think that the Brazil
stocks and ETFs will see revival of investors’ interest anytime
soon. (Read: Forget the BRIC ETFs, Focus on the PICKs)
Biggest Brazil ETF MSCI Brazil Index Fund (EWZ) has lost almost
1.5 billion in assets this year and is down 8.8% year-to-date.
Market Vectors Brazil Small-Cap ETF (BRF) is down about 46 million
in assets and 3.9% in price terms this year.
iShares MSCI Brazil Small Cap Index (EWZS) has had a relatively
better performance among Brazil ETFs, as it is down 0.5%
year-to-date and has so far seen outflows of 0.13 million.
(Read: Five Top Performing Single Country ETFs of 2012)
It is evident that the investors seeking exposure to Latin
America are looking at some of the economies with better growth
prospects. Global X FTSE Colombia 20 ETF (GXG) has gained about 37
million in AUM and is up 15.1% in 2012. iShares MSCI Chile
Investable Market Index (ECH) has gained about $57 miilion in AUM
and is up 7.6% during the same time.
iShares MSCI All Peru Capped Index (EPU) though down in AUM ($74
million) is up 9% in price terms. Similarly the iShares MSCI Mexico
Investable Market Index (EWW) has lost $63 million in assets but is
up more than 16% in price.
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MKT VEC-BRZL SC (BRF): ETF Research Reports
ISHARS-MSCI CHL (ECH): ETF Research Reports
ISHARS-MSCI PER (EPU): ETF Research Reports
ISHARS-BRAZIL (EWZ): ETF Research Reports
ISHARS-MS BR SC (EWZS): ETF Research Reports
GLBL-X/F COL 20 (GXG): ETF Research Reports
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