What Lies Ahead for Brazil ETFs?

In 2017, Brazil’s registered its lowest inflation rate since 1998. Although it surpassed forecasts, it missed the official target range of the Brazilian central bank, leading analysts to believe that the central bank will keep interest rates at an all-time low.

More to the Headlines

Brazilian benchmark IPCA consumer price index increased 2.95% in 2017, the lowest level since 1998. Although it beat Reuters’ forecast of 2.8%, it missed the central bank’s target range of 3-6%. However, the monthly increase in consumer prices in December was impressive, as it increased 0.44% compared with a Reuters forecast of 0.3%.

The increase in consumer prices was driven primarily by higher food prices, as it increased 0.54% in December compared with a contraction of 0.38% in November.

Moreover, policymakers cut the benchmark interest rate to a record low of 7% in their December monetary policy meeting. Interest rate futures data forecast a further cut to the benchmark Selic rate by 25 basis points in February.

Economic Situation

Brazil’s GDP advanced 0.1% sequentially in the third quarter of 2017 compared with an upwardly revised 0.7% previously. On a year over year basis, it increased 1.4% compared with an upwardly revised 0.4% in the previous period. Moreover, the World Bank expects Brazilian GDP to grow 1% and 2% in 2017 and 2018, respectively.

Coming to structural reforms, the lower house of Congress delayed a vote on trimming social security until February. Brazilian president Michel Temer expected a vote by late December, but lack of adequate support for the pension cuts lead to the delay. The bill’s primary policies revolve around increasing the retirement age and decreasing generous pensions for public sector employees.

Brazil’s economy has been recovering from a terrible recession, with two consecutive years of negative growth. The economy contracted 3.8% and 3.6% in 2015 and 2016, respectively. Investors are worried about the passage of Temer’s reform in an election year, as a failure for this reform will weigh on Brazil’s efforts toward reducing the increasing public debt and weakening the economy’s recovery. “Even though 2018 is an election year, the fiscal crisis is so big that it will be possible to get pension reform approved,” Speaker Rodrigo Maia said.

Let us discuss some ETFs focusing on providing exposure to Brazilian equities (see all Latin America Equity ETFs here).

iShares MSCI Brazil Capped ETF EWZ

This fund is the most popular ETF providing exposure to Brazilian equities. It focuses on the most liquid companies in the large-cap segment.

It has AUM of $ 8.0 billion and charges a fee of 62 basis points a year. Financials, Materials and Consumer Staples are the top three sectors of this fund with 36.0%, 16.1% and 15.7% allocation, respectively (as of Jan 9, 2018). The top three holdings are Itau Unibanco Holding Pref SA, CIA Vale Do Rio Doce SH and Banco Bradesco Pref SA with 11.5%, 10.8% and 8.5% allocation, respectively (as of Jan 9, 2018). The fund has returned 20.0% in a year (as of Jan 10, 2018).

Let us now compare the performance of this fund to a broader Latin American ETF, ILF.

iShares Latin America 40 ETF ILF

This fund focuses on providing exposure to Latin American equities. It tracks the S&P Latin America 40 Index.

It has AUM of $ 1.5 billion and charges a fee of 49 basis points a year. From a geographical perspective, the fund has top exposures to Brazil, Mexico and Chile, with 58.4%, 23.2% and 12.3% allocation, respectively (as of Jan 9, 2018). From a sector look, Financials, Materials and Consumer Staples are the top three allocations of the fund, with 34.9%, 18.2% and 15.3% exposure, respectively (as of Jan 9, 2018). Vale ADR, Itau Unibanco Holding ADR and Banco Bradesco ADR Reptg Pref SA are the top three holdings of the fund, with 9.6%, 9.2% and 6.8% exposure, respectively (as of Ja 9, 2018). The fund has returned 24.0% in a year (as of Jan 10, 2018).

Below is a chart, comparing the one-year performance of the two funds.

 

Source: Yahoo Finance

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