After posting strong growth in the previous few years, 2012
turned out to be a turning point for Brazil, as the nation
experienced a huge setback in terms of growth. If that wasn’t
enough, the Brazilian real depreciated by more than 10% against the
dollar in 2012, further adding to the country’s woes (Time to Worry
about Brazil ETFs?).
However, in this gloomy environment, the positive aspect of the
economy was low unemployment levels when compared with other
developed countries thanks to the increase in government
expenditure and policies to stimulate consumption.
This year the economy may be poised for somewhat better growth
than 2012 as the government continues to take necessary measures to
stimulate the economy and make it more competitive.
With this aim, the central bank of the country systematically
reduced the interest rates. In order to increase liquidity, reduce
consumers’ debt burden and encourage investments, interest rates
were lowered to the level of 7.25% (Are Investors Abandoning Brazil
ETFs?)
The effort to reboot the economy saw the government undertaking
a number of stimulus measures. Infrastructure spending is also on
an uptrend as the country prepares to host the 2014 World Cup and
the 2016 Olympic Games.
Additionally, manufacturing activity in Brazil, which got
arrested a few years back due to a lack of demand and rising
inventory levels, is once again set to rebound in 2013. A reduced
tax burden on companies, lower pay roll tax and more investment on
infrastructure by the government are expected to bring back the
pace in manufacturing activity (Brazil ETFs: More Trouble On the
Horizon?).
Furthermore, the devalued currency should reinvigorate export
activity leading to improvement in international trade and growth
in export of manufactured goods. And as employment remains at a
good level and the interest rate is declining, domestic spending
should go up resulting in consumers coming back to the
market.
Although the measures do not suggest a bull run in the economy,
at least the economy appears to rebound in 2013. Improved
infrastructure and elimination of other trade barriers could
accelerate Brazil's economic growth rate and raise its exports.
For investors willing to play this optimism in the economy in
basket form, we have briefly highlighted a few of the ETFs tracking
the economy (The Comprehensive Guide to Brazil ETFs).
MSCI Brazil Index Fund
(EWZ)
MSCI Brazil Index Fund is the oldest and the most popular ETF
which provides exposure to the Brazilian economy. The product
appears to be liquid as more than 12 million shares change hands on
a daily basis and provides exposure mostly to the large cap stocks
of Brazil.
The fund invests its $9.2 billion of net assets in 83 stocks
with highly concentrated exposure in large cap equities. As much as
53.4% of its assets go towards the top ten holdings. Vale, Itau
Unibanco Holding and Petrobras (PBR) occupy the top line of the
fund (Forget Petrobras with These Brazil ETFs).
Among the sectors that the fund is most concentrated in,
Financials and Materials hold the lion’s share making up 45.9% of
the total investment. For the investment made in the ETF, the
investor pays an expense ratio of 60 basis points.
The fund delivered a negative return of 21% over a period of one
year impacted by the slowdown in the economy.
Market Vectors Brazil Small-Cap ETF
(BRF)
In order to have a pure play in the Brazilian economy, Market
Vectors Brazil Small-Cap ETF was introduced which provides exposure
to the small cap equities of the Brazilian market.
The fund holds a total of 74 small cap stocks in which it
invests an asset base of $586.4 million of which 31.5% is invested
in the top 10 holdings. So unlike EWZ, the fund appears to be
diversified with assets not just concentrated in the
top holdings but also spread among other companies beyond the
top holdings (Do Country ETFs Really Provide Diversification?).
Among the different sectors, consumer discretionary and
industrials occupy the top two positions with 56.8% of investment
made in these two categories. The fund charges a premium of 59
basis points for the investment.
Despite a slowdown in the economy, it seems that the small caps
of the region performed a bit better, losing just 8% in the past
year and adding almost 10% in the past three month period.
Brazil Infrastructure Index ETF
(BRXX)
As Brazil looks to improve its infrastructure, investors should
look to invest in The Brazil Infrastructure Index ETF (BRXX) for a
timely exposure.
BRXX holds a total of 30 stocks. The fund has a total asset base
of $81.2 million of which 51.8% is invested in the top 10 holdings.
A high concentration level in the top 10 holdings suggests that the
fund is not spread among other companies.
Among sectors, the fund has made double-digit allocation in
electricity, gas, water and multiutilities and Real Estate
Investment & Services. The fund has been beaten down as well
over the past year, but has added about 3% in the trailing three
month period, along with paying a sizable yield.
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MKT VEC-BRZL SC (BRF): ETF Research Reports
EMERG-GS BRAZIL (BRXX): ETF Research Reports
ISHARS-BRAZIL (EWZ): ETF Research Reports
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