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
cheap investments.
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
inflation-targeting band).
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
(BRL) 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 the
doldrums.
Thanks to this optimism, investors should focus on the
ultra-popular–MSCI Brazil Index Fund (EWZ), 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
significantly.
The product has slightly outperformed the most popular funds
targeting the region including the iShares Latin America 40 Index
Fund (ILF) by roughly 100 bps, iShares MSCI Emerging Markets Latin
America Index Fund (EEML) by 30 bps, and other regional products by
similar amounts as well.
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
Unibanco (ITUB), Petrobras (PBR) and Banco Bradesco (BBD) 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 Neutral. 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:
![](http://staticzacks.net/images/zacks/blogs/1363703714_scaled_425.jpg)
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.
Bottom Line
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 ETFs in the Zacks ETF Center).
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 in 2013.
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ISHARS-BRAZIL (EWZ): ETF Research Reports
ISHARS-LATIN 40 (ILF): ETF Research Reports
PETROBRAS-ADR C (PBR): Free Stock Analysis Report
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