Economic woes are not new to the Brazilian economy with its gross domestic product shrinking for the fifth successive quarter. Brazil recorded a 5.4% year-over-year decline in GDP in the first quarter of 2016. On a quarterly basis, the GDP fell 0.3%, which is better than a 1.3% decline in the previous quarter and 0.8% estimated by analysts.
Though the data came in better than the market estimate of 6% decline and a 5.9% plunge recorded in the previous quarter, analysts view this uptick as a desperate effort by Rousseff to gain support of the people by boosting government spending in April ahead of the vote. Government spending grew 1.1% sequentially.
Notably, Brazil's suspended president Rousseff, who was accused of influencing the budget, has been subjected to an impeachment process.
In the first quarter, investment and consumption lagged while net external demand was the bright point. Household consumption fell 6.3%, gross fixed capital formation contracted 17.5% while exports of goods and services jumped 13% and imports plummeted 21.7%.
Has Recession Bottomed Out?
A group of analysts believe that this economy is now showing signs of a ' depression '. As per Goldman Sachs, Almost a two-year long recession led the Brazilian economy to shrink to its size in late 2010. And there was a plunge in real per capita GDP of 9% that gave the economy the tag of being 'in depression', going by a Financial Times article.
Some other economists believe that the recession has reached a bottom. As per this school, 'the worst of the recession was in fact in the second half of last year, and this year's recession will be more contained than last year'. In fact, signs of easing in the rate of contraction have already started to give such cues. The change in governance shored up the confidence that people have in the economy in April and May.
In fact, previously we saw how any news against Rousseff turned out favorable for the stocks as her administration was infamous for excessive red tape in the private sector. Notably, Brazilian stocks staged a rally in the initial part of 2016 on Dilma Rousseff's impeachment proceedings (read: Fragile Five ETFs Not At All Fragile This Year? ).
The prospect of a change in governance set the Brazil ETFs on fire, despite a faltering economy. Now it remains to be seen if the stand-in president Michel Temer is able to effectively implement measures to revive the economy (read: Why Brazil ETFs are Gaining despite Economic and Political Risks? ).
The finance ministry also expects a recoil in the economy in the next few quarters by "the timely implementation of measures recently announced." The new finance minister announced measures like revamping the bloated pension system to avoid further deterioration in government accounts, as per Bloomberg.
These were internal issues. Externally, a lot depends on the economic condition of China - one of Brazil's key trading partners. Also, a sustained recovery in commodity prices is also needed as the economy is rich in commodities from metals to agricultural products.
Threats Ahead
Apart from political instability, Fed hike worries which may prompt a 2013-like 'Taper Tantrum' and spreading of the Zika virus are added concerns. Normally, as the Fed tightens policies, U.S. Treasury bond yields surge and emerging markets see investments gushing out.
ETFs to Watch
Whatever the case, it may take some more time before we could be sure about the momentum in the Brazil ETFs. GDP reports indicate that large-cap Brazil ETFs like iShares MSCI Brazil Capped (EWZ) are a better choices for investments, if anybody trusts that the worst is over. This is because large-cap stocks are more exposed to foreign demand than smaller caps (read: Top & Flop ETF Performers of May ).
Small-caps deal with domestic consumption, an aspect in which the Brazilian economy is lacking presently. This makes small-cap ETFs like iShares MSCI Brazil Small-Cap ETF (EWZS) and VanEck Vectors Brazil Small-Cap ETF (BRF) vulnerable options. Then again, the country is hosting the Summer Olympics in a few days this year. Hosting such a big event should bolster activities and transactions in the domestic economy, which in turn may brighten small-cap ETFs.
So, investors having a strong stomach for risks may play this economy, but wary investors could wait on the sidelines for better entry points.
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ISHARS-BRAZIL (EWZ): ETF Research Reports
ISHARS-MS BR SC (EWZS): ETF Research Reports
VANECK-BRZL SC (BRF): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
