Why It Is Time for the Brazil Infrastructure ETF - ETF News And Commentary
August 22 2012 - 6:45AM
Zacks
As investors grow increasingly skeptical over the health and
near term future of emerging markets, many are taking a closer look
at a once favorite destination of Brazil. The country is now
growing at a rate of just 2% (or less) a year, a huge decrease from
the impressive 7.5% level that the nation saw just two years
ago.
This sharp downturn in growth looks likely to put some pressure
on the central bank to push rates even lower as a way to spark much
needed growth. This could be especially true if inflation levels
remain moderate, giving the central bank plenty of policy options
in order to accomplish its objectives (see The Comprehensive Guide
to Brazil ETFs).
Beyond monetary stimulus, the country could also see a wave of
spending thanks to two important events coming up in the next four
years; the World Cup in 2014 and the 2016 Summer Olympics in Rio de
Janeiro. Both of these events could greatly add to infrastructure
expenditures and demand, creating a boon for the nation’s
chronically decrepit road and rail network as well as the main
firms that operate in this segment.
In fact, according to the Miami Herald, the nation will be
pouring cash in to its airport system in order to handle the influx
of visitors, more hotels to house the spectators, and a far
reaching transportation network to move everyone around more
efficiently. Some estimates put the cost at $14.4 billion including
$11.6 billion in public investment, a situation that could be a
nice stimulus for the infrastructure industry in the country.
Yet even these figures could be grossly understated, especially
when comparing them to previous Olympics. According to a report by
the Motley Fool, cost overruns in the last four Olympic games
averaged 157% including a 375% overrun for London
on the high end and ‘only’ a 46% overrun for Beijing (read Five
Emerging Market Infrastructure ETFs for the Coming Boom).
This suggests that the spending just for the Olympics, not even
counting World Cup programs or the rest of the infrastructure
spending that will be necessary for the country, could be far more
than what many are projecting. After all, Brazil will likely be
using the upcoming events to showcase to the world that the country
has ‘made it’—much like China in 2008—and since Brazil ranks in the
bottom half of the world for overall infrastructure quality (behind
nations like Ethiopia and Syria) spending will necessarily have to
surge in the coming years.
In order to jumpstart this spending, it appears as if Brazil is
already handing over some management of its roads and rails to
independent sources, suggesting that the government is willing to
work with the private sector on these issues. Recent reports
suggested that $65 billion in new measures would be undertaken in
the sector including having the government sell thousands of miles
of highways and railways to private investors for them to operate
(hopefully) more efficiently (read Three Overlooked Emerging Market
ETFs).
With these trends and the prospect for more stimulus and
spending on infrastructure in the coming months and years, it could
still be an interesting time to target the sector via an
exchange-traded fund. While investors could make a play on the
broad market, the more targeted EGShares INDXX Brazil
Infrastructure Index Fund (BRXX) seems like the best way
to play the trend.
Although the fund has crushed broad Brazil ETFs like
EWZ so far this year (adding about 8.8% compared
to a nearly 5% loss for EWZ), the product remains well below its 52
week high. In fact, the fund still has a long way to go to get back
up that level, suggesting that there are still decent gains to be
had in this slice of the market.
Furthermore, due to the diversified nature of the ETF, the
product looks to be a lower risk play on the Brazilian
infrastructure market as risks will be spread out across 30
different firms. Also, no one company makes up more than 7% of the
assets, while industry exposure is extremely spread out, as no more
than 15% is in any single industry (see Forget Petrobras with These
Brazil ETFs).
While the expense ratio is somewhat high at 85 basis points and
the trading volume isn’t the highest at about 30,000 shares a day,
the product does have $75 million in AUM suggesting that it will be
around for a while.
Lastly, the impressive yield on the product, at roughly 4.2%,
and the trailing P/E ratio of just 11.2, suggest that it is also a
value fund, making it a potentially low risk way to play what looks
to be a very real, and likely to happen, spending trend in the
nation. After all, if Brazil wants to keep growing it will have to
work its way up the infrastructure rankings and if it the nation
wants to be considered a true economic power—like China—it must be
able to showcase to the world that it is capable of getting things
done (read Latin America ETFs: Beyond Brazil).
The upcoming World Cup and Olympics will undoubtedly be real
tests for the nation and it isn’t unreasonable to assume that
Brazil will throw money at the problem in order to prove itself on
the world stage. This situation makes BRXX a very interesting pick
for the next several years, suggesting that this could be the way
to play the region in the near term.
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Follow @Eric Dutram on Twitter
Author is long BRXX.
(BRXX): ETF Research Reports
(EWZ): ETF Research Reports
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