ETFs that track the performance of Brazil equities are among the top performing ETFs in Europe over the last month. Brazil equity ETFs from Lyxor, iShares, Deutsche Asset Management, HSBC and Amundi are all up over 10% in the month to 25 July 2017.
The MSCI Brazil Index rose 66% in 2016.
In recent years, Brazilian equities have given investors a volatile ride (See: Brazilian equity ETFs buoyed but economic recovery still yet to materialize). The country slid into recession in 2015 around the same time as a political corruption scandal centred on state-owned oil company Petrobras began engulfing the country.
The resource-rich economy was hit hard by declines in commodity prices through 2014 and 2015 due in part to slower demand from China. Former president Dilma Rousseff was then impeached in 2016 for breaking budgetary rules and by the end of that year, the country was in the grip of its worst recession since records began.
Since arriving in office, Ms Rousseff’s successor, Michel Temer, has embarked on a series of austerity reforms focused on restoring fiscal discipline, triggering inflation and interest rates to fall sharply and helping the country emerge from recession by recording GDP growth of a modest 1%. Although unpopular with the electorate, the reforms have gone down well with investors, helping the MSCI Brazil Index gain 66% during 2016 compared to just 11% for the MSCI Emerging Markets Index.
However, a fresh corruption crisis emerged in May 2017 when a leaked conversation appeared to show Mr Temer discussing paying off a former politician, now in prison for his involvement in the Petrobras scandal, to keep his silence. Mr Temer denies allegations of corruption and obstruction of justice.
Mr Temer has resisted calls to resign and although his weakened position might make reforms harder to push through, it seems possible he will hold on to enough allies in Congress to block the investigation and see out the rest of his term in office. Brazilian equities initially slumped on the release of the leaked recording but have since recovered strongly.
The catalyst for the recent surge in Brazil’s stock market over the past month was the news on 12 July that former president Luiz Inacio Lula da Silva has been sentenced to ten years in prison for corruption and money laundering. Investors hope that this marks a turning point in the fight against corruption that has dogged the country for the last three years.
One day later, Mr Temer signed into law new labour market reforms aimed at reducing unemployment, currently over 13%, and improving efficiency. Reforms of the labour market are much needed – Brazil currently sits a lowly 117 out of 138 countries ranked by labour market efficiency according to the World Economic Forum.
The underlying fundamentals of Brazil remain solid. It is a country with a rich supply of natural resources that has a growing and increasingly educated workforce. Brazil’s sizeable markets continue to attract foreign direct investment. Much of the country’s future prospects now depend on how successful the current and proposed reforms are, and whether its politicians can clean up their acts to stay in office long enough to see those reforms through.
The MSCI Brazil Index is made up of around 50 constituents and covers around 85% of the Brazilian equity universe. The largest constituents are Itau Unibanco (11.6%), Ambev (8.4%) and Banco Bradesco (8.4%). Financials are the dominant sector with 35.7% of the weight, followed by consumer staples (14.1%), materials (13.1%) and energy (11.8%). The index is up 10.4% in the month to 25 July 2017.
Of the European-listed ETFs that track the MSCI Brazil index, the iShares MSCI Brazil UCITS ETF (LON: IDZB) is the largest with $342m in assets under management (AUM). It has a total expense ratio (TER) of 0.74%. The db x-trackers MSCI Brazil UCITS ETF (LON: XMBD) has £127m in AUM with a TER of 0.65%. The HSBC MSCI Brazil UCITS ETF (LON: HMBR) has AUM of $47m with a TER of 0.60%, while the Amundi MSCI Brazil UCITS ETF (LON: BRZ) is the cheapest with a TER of 0.55% but has only $19m in AUM.
The Lyxor Brazil UCITS ETF (LON: RIOU) has fared slightly better than the others, gaining 11.2% over the past month. It tracks the Ibovespa Index, representing 50 highly traded stocks listed on the São Paulo Stock, Mercantile & Futures Exchange. The fund has $433 million in AUM with a TER of 0.65%.