Investments in Brazil, including ETFs focused on the country, have received a shot in the arm from the elimination of a 2 percent tax on foreign equity investors—a move aimed to help spur growth in Latin America’s biggest economy at a time of heightened global anxiety.
The government also said it was cutting to zero a 6 percent tax for foreign holders of corporate debt, saying the steps were designed to keep Brazil from being contaminated by the effects of the global debt crisis that most recently has engulfed Europe, according to a story in the Wall Street Journal.
The move effectively eliminates one of the most persistent and clearly explainable premiums in the ETF market, and has put strong buying interest back into funds such as the $10.26 billion iShares MSCI Brazil Index Fund (NYSEArca:EWZ - News). The popular and highly liquid ETF has jumped more than 12 percent in the past week alone, due to a number of factors, including the elimination of the tax.
While the taxes were instituted, in part, to cap gains on Brazil’s currency—the real—the move by the government to do away with the taxes means “game-on” for investors who look to Brazil as one of the most prospective opportunities in quite some time.
After all, the country is hosting the men’s World Cup soccer tournament in 2014 and the Summer Olympics in 2016—two events that are requiring massive investments in the country’s infrastructure. Moreover, Brazil looms largely as a producer of commodities, particularly agricultural products that are being consumed in ever-greater quantities in many rising Asian countries such as China.
The ETF’s premium to net asset value, which has been above zero for much of the time since the taxes were imposed, looks like it’s evaporating, as the chart below shows.
EWZ’s Premium and Discounts to NAV In the Past 12 Months
Sky’s The Limit
In any case, it’s clear buyers are back after the Brazilian government’s move.
EWZ’s price jumped more than 1 percent on Thursday and another 2 percent on Friday after the announcement. Brazilian Finance Minister Guido Mantega announced the elimination of the tax before the market opened on Thursday.
The moves added to EWZ’s powerful rally of almost 6 percent on Wednesday in the aftermath of the coordinated action by six central banks around the world aimed at throwing European banks a lifeline and communicating to jittery financial markets than a repeat of a Lehman Brothers-like collapse of a major financial institution wouldn’t be possible.
The Federal Reserve, the Bank of Japan, the Bank of England, the Swiss Central Bank, the European Central Bank and the Bank of Canada all agreed to cut by half a percentage point the rate on short-term U.S.-dollar loans for banks in Europe and around the world.
In a move that was almost surely related, China lowered the reserve requirement for its banks, also by half a percentage point.
Brazil’s move to repeal the taxes on foreign investors also seems to have been part of the flurry of tactical macroeconomic maneuverings last week, even if, as in the case of China, the linkage to the six major central banks wasn’t explicit. The timing suggests more than a mere coincidence.
In any case, Brazil’s policy shift has unleashed buying in all kinds of Brazil-focused ETFs. The EGShares Brazil Infrastructure Fund (NYSEArca:BRXX - News), for example, is up more than 9 percent in the past five sessions.
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