Of late, Brazil small-cap ETFs have been hurt more than
large caps in the country like
on slowing economic growth prospects. The Brazilian economy which
saw a turnaround following the Fed's 'taper hold' decision in
September, started faltering again probably in anticipation of
subdued growth ahead.
To add to the woes, taper fears have resurfaced as better job and
GDP data in the U.S. Although the Fed's Vice Chairman Janet Yellen
recently made some
on this issue, it is quite likely that the speculation about taper
timing will persist and foreign investors will pull out funds from
the riskier emerging market on worries over a 'QE taper'.
History has shown that smaller companies generally bounce back in a
reviving economy faster than the larger ones and also fall faster
if the scenario reverses. Hence, we are likely to see a downturn in
small companies in a market that is crippled with structural
problems like rising inflation and slowing growth, such as what is
currently the case in Brazil.
Raging Rate Hikes Halter Growth
Although Brazilian inflation began to calm down since July on a
quarter-over-quarter basis, it still remains high at
in October, well above the policy makers' target of
. Also, this downward trend in inflation has also been achieved
through a set of interest rate hikes.
Notably, at present, Brazil's benchmark interest rate is pegged at
9.50%, staying at the peak
among the world's largest economies
, after five successive raises since April. If this is not enough,
suspects inflation to flare up again in the months ahead. Inflation
is expected to finish 2013 at
, as per a survey by Brazilian economists.
The rate is also expected to stay stubborn at
in 2014. Finding no other way to contain the potential rise in
inflation, analysts expect monetary policy committee to go for
another 50 bps hike in their November meeting which is really not a
healthy sign for the country's growth. Rampant rate hikes will
likely mar the business activity of the country and check the
Brazil's growth rate is lagging many of its emerging market
cousins. In fact, with growth projections falling
for 2013 GDP, the country has now come in line with the developed
nations like the U.S. and lost its glory of its former
growth rate in 2010. Notably, the U.S. economy posted around 2.8%
growth in the third-quarter 2013, beating out this once surging
Short Brazil with These Inverse ETFs
Since small caps are more exposed to domestic dynamics, these will
likely suffer more than the large caps. Moreover, many times larger
companies enjoy relatively lower interest rates than the smaller
ones as the latter always involves some credit risks thanks to its
lower scale of operation. In a rising rate scenario, this might
pose threats to the small-cap companies.
The recent pullback also signals the trend as both the small-cap
iShares MSCI Brazil Small Cap Index Fund
Market Vectors Brazil Small Cap ETF
) lost, respectively, 13.01% and 12.77% in the last one-month
period (as of November 12, 2013) while the largest Brazilian ETF by
iShares MSCI Brazil Capped ETF
) lost just 6.89%.
While small-caps are mostly beaten-down in Brazil, EWZ is bearing
the brunt of it as well. Some of its major holdings like
) - the Brazilian state-run energy giant-- have raised investors'
concern and haven't been all-stars either.
Another key holding -
) - one of the world's largest producers and exporters of iron ore,
is suffering reduced production, with no visible sign of recovery.
Yet another important holding
- with 7.0% of the total - is reeling under pressure as evident
from the lower-than-expected earnings posted in the recent past.
Thus, we refrain from being optimistic on not only small-caps but
the large-cap Brazilian ETFs as well.
As a matter of fact, Brazil's recovery is tied with China's fate to
a large extent with the latter being one of the largest importers
of Brazilian raw materials.
toward West Africa to source iron ore can prove a major setback for
Thus, at this juncture, it is advisable to opt for a wait-and see
approach on Brazilian ETFs across the range of capitalization
levels and focus elsewhere for emerging market ETF opportunities
Time to Buy These Top Ranked Latin America ETFs
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MKT VEC-BRZL SC (BRF): ETF Research Reports
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