U.S. investors in Brazil have been plagued by the depreciation
of the real over the past year, and last week was no exception as
Brazil's central bank again slashed its benchmark borrowing
In the past year, U.S. investors in Brazil have seen returns of
-17.62 percent, while local investors have suffered losses of just
1.27 percent, as shown in this week's IndexUniverse Currency Impact
Report. Last week alone, U.S. investors in Brazil lost 1.14
percent, while locals saw gains of 1.10 percent.
Isolating the currency variable, the real has depreciated by
15.29 percent against the dollar over the past year, diminishing
any positive gains that have resulted from pure equities exposure,
such as the iShares MSCI Brazil Index Fund (NYSEArca:EWZ).
The table below illustrates the real's impact.
U.S. investors in EWZ and in the First Trust Brazil AlphaDex ETF
(NYSEArca:FBZ) have lost 16.69 percent and 12.08 percent over the
past year, respectively.
Meanwhile, investors who hedged out the currency exposure by
owning ETFs such as the db-X MSCI Brazil Currency-Hedged Equity
Fund (NYSEArca:DBBR) returned -11.92 percent.
The real's depreciation should serve as a huge cause for concern
among those still invested in one of the more prominent members of
the so-called BRIC countries-Brazil, Russia, India and China.
Earlier this week, the Financial Times argued that Brazil has
won the "currency war." The Brazilian central bank, in an effort to
end a lasting rally in the real, has lowered its benchmark interest
rate over the past 15 months by 350 basis points, bringing the rate
to 9 percent as of the latest cut last week.
To make matters even worse for U.S. investors, there's
speculation that Brazilian authorities may change the rules
governing savings accounts. If successful, the law would require
minimum returns on savings accounts.
As a result, local investors would likely move from government
bonds into the more favorable savings accounts-further forcing the
real to depreciate as investors sell their bonds for cash.
U.S. investors in Brazil-focused ETFs would do well to mind
their portfolios in the meantime, as the real may pose a further
threat to returns.
In other news, the euro gained against the dollar last week,
enhancing the returns for U.S. investors who own ETFs like the
iShares S&P Europe 350 Index Fund (NYSEArca:IEV) and even the
iShares MSCI Switzerland Index Fund (NYSEArca:EWL).
The Swiss central bank recently appointed Thomas Jordan as head
of the bank. Jordan has affirmed that he fully backs maintaining
the pegged exchanged rate for the euro against the franc.
For more data, see the IndexUniverse Currency Impact Report.
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