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Brazil Economy Gaining Steam: ETFs in Focus

Zacks Equity Research

Brazil stocks have been rallying since Bolsonaro’s presidential victory in October last year. The most popular Brazilian ETF, iShares MSCI Brazil ETF EWZ rose 13.3% in the fourth quarter of 2018. Brazil’s Bovespa index gained about 10.8% in the same time frame. Jair Bolsonaro was sworn in as Brazil's president on Jan 1.

EWZ has continued its strong run this year by returning 12.5% in the year-to-date time frame (as of Jan 9). This indicates market participants faith in the newly elected president’s ambitious agenda.  

Bolosnaro, a former army captain, rode a wave of anti-establishment sentiment to win the election as Brazilian citizens were unhappy with the rampant government corruption, increasing violence and stalled economic activity.

Per a recently published Fitch Solutions report, Brazil’s economy will rally over the next couple of quarters, thanks to the positive business sentiment bolstered by Bolsonaro’s new administration.

Challenges Ahead

Brazil is suffering from a 130 billion reais ($34.76 billion) public deficit. Therefore, Bolsonaro’s economic cabinet needs to come up with adequate measures timely in order to bring down the deficit. Per, Elizabeth Johnson, a managing director at TS Lombard, the time limit to pass reforms in Brazil is not too long. Johnson added, sentiment in the markets could dip if the administration is unable to make progress on the pension reform over the next months.

The pension system in Brazil has been affecting the economy for long. The current retirement age is 60 for men and 57 for women. As a result, the Brazilian systems need to pay high replacement rates — the percentage of a worker’s pre-retirement income paid out through a pension program at a much lower age. This has resulted in a ballooning deficit.

While speaking at an Air Force swearing-in ceremony on Jan 4, President Bolsonaro told reporters that the minimum retirement age would be 62 for men and 57 for women, effective five years after any legislation is passed. This proposed age turned out to be lower than what the ex-president Michel Temer had proposed. Temer had proposed a minimum retirement age of 65 for men and 62 for women.

In the election win, Bolsonaro’s party, PSL increased its representation from one to 52 seats in the lower house. However, Fernando Haddad party, PT, remains the largest party with 56 seats. Further, a record 30 parties will represent the next congress, which could pose some headwinds for the newly elected President’s ambitious reform agenda (read: What EM Shock? Brazil ETFs Soar on Election Optimism).

Brazil ETFs in Focus

Per Fitch Solutions, Brazil’s GDP growth is likely to hit 2.4% in 2019, up from 1.3% in 2018. However, the previous estimate for 2019 GDP was 2.5%. Chinese economic slowdown is the primary reason being the lower estimated growth, given the dip in Brazilian soy and iron ore being shipped to Beijing in 2019 (read: China's Manufacturing Activity Contracts: ETFs in Focus).

With the recent developments seen in trade talks, the Chinese economy could begin to flourish again. This will help Brazil and its ETFs.

Against this backdrop, we highlight some ETFs in detail:

EWZ

The fund tracks the MSCI Brazil 25/50 Index and comprises 52 holdings. Its AUM is $8.5 billion and expense ratio is 0.59%. The fund has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

First Trust Brazil AlphaDEX FundFBZ

The fund tracks the NASDAQ AlphaDEX Brazil Index and comprises 51 holdings. Its AUM is $129.2 million and expense ratio is 0.80%. It has returned 10.5% in the year-to-date time frame. The fund has a Zacks ETF Rank #4 with a High risk outlook (see: all the Latin American Equity ETFs here).

VanEck Vectors Brazil Small-Cap ETFBRF

The fund tracks the MVIS Brazil Small-Cap Index, which comprises securities of small capitalization companies that are incorporated in Brazil or that are incorporated outside of Brazil but have at least 50% of their revenues/related assets in Brazil. Its AUM is $93.9 million and expense ratio is 0.60%. The fund comprises 69 holdings. It has returned 8.3% in the year-to-date time frame. The fund has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: 5 ETFs Up At Least 10% in Tumultuous Q4).

iShares MSCI Brazil Small-Cap ETFEWZS

The fund tracks the MSCI Brazil Small Cap Index, which is a free-float adjusted market capitalization weighted index designed to measure the performance of equity securities in the bottom 14% by market capitalization of equity securities listed on stock exchanges in Brazil. Its AUM is $73.7 million and expense ratio is 0.59%. The fund has returned 8.5% in the year-to-date time frame. The fund has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

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