Brazil ETFs Lead World Indexes Lower

• Trang Ho
• On 6:11 pm EDT, Tuesday October 20, 2009

Brazilian stocks plunged the most in three months Tuesday following news the government is taxing foreign stock and bond trading to stem a sharp appreciation in its currency and speculation in its stock market.

IShares MSCI Brazil Index (NYSEArca:EWZ - News) sank as much as 6.7% in intraday trading before rebounding at noon and closing in the upper end of its intraday range. It ended down 3.8% to 73.36 in more than triple average volume.

Market Vectors Brazil Small CapBRF skidded 3.1% to 44.43 in nearly four times usual trade.

Tax Measure

The new 2% tax on foreign fixed-income and equity buys was announced Monday and went into effect Tuesday. The country imposed a similar tax last year but axed it during the global credit crisis.

Finance Minister Guido Mantega said Monday it aims to curb the runaway real, which has risen 31% this year -- the most of any currency -- against the U.S. dollar.

Its strength stems from a recovery in commodity prices and a strong economic outlook for at least seven years.

The country has also benefited from debt-rating upgrades in September by all three major agencies, winning bids to host the World Cup in 2014 and the Olympics in 2016, and recent petroleum finds that will make it a primary producer of crude oil in the medium term.

Its stock market has regained all of its losses since mid-2007. International reserves rose by $25 billion this year to $225 billion, according to Moody's Economy.com.

"Since nothing structural has changed in Brazil, other than the imposition of a transitory tax on capital flows, markets will return to normal functioning," wrote Alfredo Coutino, a director and Latin America specialist for Moody's Economy.com.

"In fact, it would not be a surprise if the effect vanishes sooner rather than later and capital flows show an even stronger return."

Carl Delfeld, managing director of Chartwell Partners, an advisory firm specializing in foreign markets, is wary.

The tax may be "a prelude to an interest-rate hike, which would strengthen the real more," and result in the unintended consequence of making Brazil's exports less competitive, he said.

"This sort of government interference is a real risk because they can mess things up," he said. "I am worried that this trend will continue to other markets."

Chart Action

EWZ has soared 110% year to date vs. 64% for the benchmark MSCI Emerging Markets index. It's the fourth-highest returning ETF year to date behind those invested in Russia, coal and lead. These have vaulted 121% to 144%.

EWZ has approached an area of technical resistance in the low 70s. It trades 28% below its all-time high of 102.21 from May 2008.

BRF, which launched in May, has jumped 81%, year to date.

EWZ and BRF carry the fourth highest Relative Strength Rating, 85, of all nonleveraged ETFs. They sport healthy Accumulation/Distribution Ratings of B+ and A+, respectively.

Delfeld's Chartwell Emerging Markets Balanced portfolio has a 5% weighting each in EWZ and BRF. Delfeld believes the pullback offers a chance to buy shares, but says he would close out his positions if they fall below their 50-day moving averages.

Brazil offers a better value than other BRIC countries, he added.

Even after the run-up, stocks trade at a lower price-earnings ratio in Brazil than in other markets.

EWZ had a P-E of 19.38 vs. 24.63 for iShares FTSE/Xinhua China 25 Index (NYSEArca:FXI - News) as of Sept. 30, according to iShares' Web site.

Delfeld recommends playing the weakness in the dollar against emerging market currencies with WisdomTree Dreyfus Brazilian Real (NYSEArca:BZF - News), PowerShares Emerging Markets Sovereign Debt (NYSEArca:PCY - News) and WisdomTree Dreyfus Emerging Currency (NYSEArca:CEW.TO - News).

Buzz up!