Over the past two years, Brazil has shown weakness among the
four BRIC (Brazil, Russia, India and China) nations due to low
productivity and heightened inflation. The economy expanded at a
meager rate of 0.9% in 2012, the slowest in three years. This
slow growth pushed Brazil to the seventh position, behind
Britain, in terms of total size of its economy (read:
Are BRIC ETFs in Trouble?
Now, with manufacturing growth, higher retail sales,
increasing consumer spending as well as robust domestic demand,
the Brazilian economy appears to be on the path to recovery. This
economy is expected to grow 3.5% this year and 4% in the next, as
per the International Monetary Fund forecast.
The bright outlook comes mainly from a revival in investments
that increased in the last quarter after declines in four
consecutive quarters. Additionally, the government is taking
several steps to boost growth in the country with tax cuts and
It is also seeking a flexible monetary policy that could lead
to possible interest rate hikes in order to tame inflation
(currently at 6.31% and close to the 6.5% ceiling of the nation's
Fortunately, there is not that much tension looming on the
unemployment front, which currently stands at 5.4%, the lowest
level since March 2002.
The Brazilian currency is also strengthening, signaling the
bullish growth prospects for the nation. The
Brazilian Real (
is up 3.7% against the dollar so far in 2013, and recorded the
biggest gain among 32 major currencies this year (read:
Will Brazil ETFs Rebound in 2013?
Furthermore, the economic sentiments are improving globally
albeit at a slower pace. The country should also see a surge in
construction and infrastructure spending as it prepares to host
the 2014 World Cup and the 2016 Olympic Games. These could act as
a new stimulus program for the nation and help to pull it out of
Thanks to this optimism, investors should focus on the
MSCI Brazil Index Fund
), which tracks the MSCI Brazil 25/50 Index - to target the
country. The product added 3% in the last three months,
indicating a reversal in trend from the last three years, which
were moderately in red.
Though this Brazil ETF lost around 0.38% year-to-date (as of
March 15), it is leading the broader Latin American funds
The product has slightly outperformed the most popular funds
targeting the region including the iShares Latin America 40 Index
) by roughly 100 bps, iShares MSCI Emerging Markets Latin America
Index Fund (
) by 30 bps, and other regional products by similar amounts as
This remarkable performance was aided by its holdings
breakdown which is heavily skewed towards financial securities.
The fund has nearly 28% of the assets in the sector, which is
leading the overall market in 2013 owing to strong performances
by the banking stocks (read:
What is Driving Bank ETFs Higher?
The ETF is also well spread across its 82 securities in the
basket with less than 50% of the assets in top 10 holdings. Itau
), Petrobras (
) and Banco Bradesco (
) occupy the top three positions in the basket with 7.54%, 7.29%
and 6.37% share, respectively.
PBR, which has been suffering in terms of earnings over the
last two and half years, has recently made a smart move by
raising diesel prices. This move could be the beginning of a
change in the business and might fuel earnings growth prospects
going forward for this important company.
For this reason,
Credit Suisse has upgraded PBR to Outperform from
. This news is also driving EWZ higher this month as PBR alone
had gained 20.58% since the beginning of March.
The ETF focuses on the large cap segment that accounts for 84%
of EWZ, while mid cap takes the remaining portion. In terms of
style exposure, the product has a tilt towards growth stocks,
ensuring higher returns to investors, especially in booming
periods, as these offer above-average revenue and earnings growth
with high price-to-book ratio.
Since the Brazilian economy is rebounding slowly, the growth
fund seems like a logical choice for those expecting a return to
market health in the second half of the year (read:
The Best Investing Style ETF This Fiscal?
Apart from fundamentals, let us have a technical look at the
chart for the Brazil ETF and its trends:
From the above chart, EWZ is currently showing weakness on the
price front as it is trading below the 9 EMA line and it has met
the 50 EMA line. However, the fund is trading above the 200 EMA
line, suggesting a possible trend reversal.
Additionally, the fund is trading near its resistance level of
$56. Crossing this level will show a clear strong uptrend. It has
also witnessed a bullish breakout accompanied by very high
volumes of nearly 12.5 million shares per day on average.
Thanks to its extreme liquidity, investors do not have to pay
an additional cost beyond the expense ratio of 0.60%. The fund
has an impressive asset base of $8.2 million, so trading should
be quite easy in this product (see more
Given its fundamental, technical and economic outlook,
investors with a high risk tolerance and desire for more income
could find EWZ an interesting choice. The Brazilian economy is
showing signs of improvement but is not expected to rebound at
least by the second half of the year.
As a result, the overall outlook for Brazil is still neutral
until and unless more positive data comes into the picture.
Hence, we are maintaining our Zacks ETF Rank of 3 or 'Hold' on
EWZ, but we think better news could be ahead for this Brazil ETF
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