Brazil ETFs Try To Stay On The Medal Podium

To exhaust Summer Olympics-related metaphors, if medals were given to exchange traded funds, the iShares MSCI Brazil Capped ETF EWZ and other Brazil ETFs would certain be on various medal stands this year.

In the case of EWZ, the largest Brazil ETF, among Latin America single-country ETFs, the Brazil fund would be the silver medalist behind the iShares MSCI All Peru Capped ETF EPU. EPU is 75.1 percent year-to-date compared to 66.2 percent for EWZ.

As followers of emerging equities know, that is quite the resurgence for EWZ and Brazilian stocks. EWZ is on pace for just its third annual gain since 2010. Even if EWZ trades flat for the rest of the year, it would easily outpace its performances from 2010 and 2012 when it rose 7.7 percent and 0.4 percent, respectively.

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One reason EWZ is surging this year is easing macro risk, previously a significant thorn in the side of Brazilian equities.

“Particularly encouraging are the improvements in the inflation trend. Prices have been easing since early 2016 (source: Bloomberg), and the new central bank committee’s focus on bringing down inflation has also helped lower inflation expectations for the year ahead. This ongoing adjustment has raised expectations of monetary policy easing, namely interest rate cuts in the fourth quarter, which will be supportive of a recovery in economic activity,” said BlackRock in a recent note. 

Easing inflation is critical for Latin America's economy because with costs high, it's difficult for Brazil's central bank to lower interest rates, which, at 14.25 percent, are among the highest in the world. The central bank there is hoping for inflation of 6.5 percent, but recent data indicate inflation in Brazil is nearly 300 basis points higher than that.

Another reason investors are bidding Brazilian stocks higher this year is political change. President Dilma Rousseff is nearing impeachment and was replaced in May interim President Michel Temer. Financial markets have cheered Temer's cabinet appointments, but Latin America's history show sanguine political environment can sometimes have short shelf lives.

“A vote to impeach Rousseff is likely to prompt an acceleration of much-needed reforms, such as cutting fiscal spending and revamping the pension system. Progress on policy changes, in turn, may go a long way towards restoring confidence of both consumers and investors. Nevertheless, while many believe the Senate would follow through with Rousseff’s impeachment, we cannot rule out the opposite outcome, which would likely be adverse for risk assets especially given high market expectations,” adds BlackRock.