BRF VanEck Brazil Small Cap ETF

2012 started on a strong note for the emerging economies but many of them have been hit recently by slowdown concerns. Of the giant BRIC nations, Brazil seems to be the worst hit.

Brazil had benefited immensely from the decade long commodity boom but growth seems to have stalled now mainly due to slowdown in its major export destinations. (Read: Three Excellent Dividend ETFs for Safety and Income)

According to the latest survey of economists by the Brazil’s central bank, the GDP will grow at a rate of just 2.2% this year. Last year the economy grew at 2.7%, down sharply from 7.5% growth in 2010.

The central bank began cutting rates in the second half last year and now the key Selic rate is at a record low of 8%, after a series of eight rate cuts. With inflation touching a two-year low of 4.9% in June, the central bank still has room to lower the rates further. (Read:The Five Best ETFs over the Past Five Years)

Apart from the rate cuts, the authorities in Brazil have taken several other measures to stimulate the economy and boost domestic demand. As a result of massive efforts, unemployment has remained low and consumer demand continues to be strong but the infrastructure and investment continue to suffer.

As a result of low unemployment rate (~6.0%), a rising middle class and generous pay increases (wages are indexed to inflation and GDP growth), the domestic demand has continued to grow.

The property prices have skyrocketed and auto sales have boomed in the Latin America’s biggest economy, due to easy access to credit. Credit as a percentage of GDP has doubled to about 50% in last ten years. However, rapid credit expansion has resulted in rising non-performing loans. Consumer default rate rose to 8% in May (30-month high).

Though as of now, non-performing loans are not a big concern for banks’ health as the Brazilian banks are well capitalized and unemployment remains low, but their rise signals caution. (Read: Forget T-Bonds, Invest in These Top Corporate Bond ETFs)

With about 20% of Brazil’s exports headed to the Euro-zone and about 18% to China, the export demand will continue to be weak in the coming months.

The stock market index Sao Paulo Bovespa is down 4.3% due to slowdown fears and the Brazilian Real is down about 9% against the US Dollar (partly due to the currency war waged by the government), in 2012.

In view of the circumstances, we do not think that the Brazil stocks and ETFs will see revival of investors’ interest anytime soon. (Read: Forget the BRIC ETFs, Focus on the PICKs)

Biggest Brazil ETF MSCI Brazil Index Fund (EWZ) has lost almost 1.5 billion in assets this year and is down 8.8% year-to-date. Market Vectors Brazil Small-Cap ETF (BRF) is down about 46 million in assets and 3.9% in price terms this year.

iShares MSCI Brazil Small Cap Index (EWZS) has had a relatively better performance among Brazil ETFs, as it is down 0.5% year-to-date and has so far seen outflows of 0.13 million.  (Read: Five Top Performing Single Country ETFs of 2012)

It is evident that the investors seeking exposure to Latin America are looking at some of the economies with better growth prospects. Global X FTSE Colombia 20 ETF (GXG) has gained about 37 million in AUM and is up 15.1% in 2012. iShares MSCI Chile Investable Market Index (ECH) has gained about $57 miilion in AUM and is up 7.6% during the same time.

iShares MSCI All Peru Capped Index (EPU) though down in AUM ($74 million) is up 9% in price terms. Similarly the iShares MSCI Mexico Investable Market Index (EWW) has lost $63 million in assets but is up more than 16% in price.

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