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Brazil ETFs are Hot Post Presidential Election Results

Zacks Equity Research
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iShares MSCI Brazil exchange-traded fund EWZ increased 6.74% on Oct 8 — the biggest gain in nearly 16 months — as  the investor-friendly candidate Jair Bolsonaro won 46.7% of  votes in the first round of votes held on Oct 7. iShares MSCI Brazil Small-Cap ETF EWZS gained 7.04% and VanEck Vectors Brazil Small-Cap ETF BRF gained 6.57% on Oct 8 (see: all the Latin American Equity ETFs).

He was followed by former Sao Paulo Mayor Fernando Haddad with 28.5% votes. They will contest each other next on Oct 28 as neither won more than 50% votes.

Brazilian Real rallied 3.2% against the U.S. dollar after Bolosnaro, far-right presidential candidate amassed a huge lead on the Oct 7 vote. Joao Ribeiro, a LatAm strategist at Nomura, expects the rally to continue “over coming days should the market solidify its conviction in a Bolsonaro victory in the second round.” The gain in Brazilian Real has raised investors’ hopes that the country can tackle the growing fiscal deficit (read: Discover These Hidden Gem ETFs on Columbus Day).

“Although markets should rally as the left-wing victory tail risks dissipate, the sustainability of the rally will be highly dependent upon the likelihood of meaningful fiscal reform next year, which is still uncertain and will be a key focus of markets after the election,” Ribeiro said in a note.

Bolsonaro, a far-right former army captain is known to express nostalgia for the country’s military dictatorship. He is contesting on grounds of making Brazil free from rampant corruption, crime and moral rot. Investors expect a broader equity sell-off if the leftist Worker’s party candidate Haddad wins the election as he is expected to maintain those policies that have kept the economy under pressure.

The right-wing candidate seeks to privatize institutions in the country and is backing an independent central bank in the country. Haddad is said to support the strengthening of public banks and companies (read: 4 Low Volatility ETF Plays for a Rocky Market).

Per Bloomberg, Bank of America Merill Lynch has upgraded Brazilian equities to overweight from neutral ahead of Bolsonaro’s potential victory pointing toward easing of political uncertainty and discounted valuations following the favorable vote counts. However, some believe a turnaround is still possible later this month.

Brazil has low inflation levels with interest rates high enough to integrate tax cuts. However, the trade war between the two biggest economies of the world is causing headwinds for emerging markets like Brazil.

This result puts the following Brazilian ETFs in focus:

EWZ

The fund tracks the MSCI Brazil 25/50 Index and comprises 54 holdings. AUM is $6.2 billion and expense ratio is 0.62%. Financials (34%) is top sectoral-target with Materials (20.2%), Energy (12.5%) and Consumer Staples (10%) being the other double-digit weight holders.

BRF

It tracks the MVIS Brazil Small-Cap Index. AUM is $77.9 million and expense ratio is 0.6%. The fund comprises 66 holdings. Consumer Discretionary (21.2%) is the top sectoral target followed by Utilities (19.5%).

EWZS

It tracks the MSCI Brazil Small Cap Index. AUM is $52.3 million and expense ratio is 0.62%. It provides exposures to small caps. Consumer discretionary (31.7%) tops the sector allocation with Utilities (15.7%) and Materials (13.3%) being the other double-digit weight holders.

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ISHARS-BRAZIL (EWZ): ETF Research Reports
 
ISHARS-MS BR SC (EWZS): ETF Research Reports
 
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