Brazilian equity ETFs buoyed but economic recovery still to materialize

Feb 1st, 2017 | By | Category: Equities

Brazilian equity ETFs continue to bring investors positive returns despite forecasts of a significant economic upturn having thus far failed to materialize.

Brazilian equity ETFs buoyed but economic recovery still to materialize

The MSCI Brazil Index rose 66.6% in value over 2016 in local currency terms.

GDP will grow just 0.5% in 2017, according to a central bank survey, while the International Monetary Fund recently announced it had cut the 2017 GDP growth outlook for Brazil from 0.5% to 0.2%. Any growth will still be welcomed by Brazilian citizens following two years of headline contractions of around 8%.

Despite the mediocre figures, the Brazilian Bovespa Equities Index is up more than 7.3% year to date and over 60% in the past 12 months. The Brazilian real is also up about 3.3% versus the dollar over the same period.

Brazilian equities outperformed broad emerging market benchmarks by approximately 55 percentage points last year, found index provider MSCI, as investors turned optimistic about the country’s prospects following the impeachment of President Dilma Rousseff and the instalment of her pro-business replacement Michel Timer. Finance minister Henrique Meirelles has since implemented more austerity and cut welfare, which also cheered investors.

Much of the Brazilian rally has been fuelled by rising commodity prices. Around a fifth of the Bovespa index is made up of shares in state-owned oil company Petrobras and mining company Vale.

Shares in Vale may continue to rise after more than doubling last year, even as iron ore prices turn lower, analysts at Itaú BBA told Reuters, due to the possibility that the Samarco joint venture may resume production this year, and reports of a governance overhaul taking place once its shareholder agreement is renewed. Their iron ore mine closed in November 2015 after a dam failure killed 19 people.

Many analysts believe it is too soon to see substantial effects of recent developments on the economy, and that slow sustained growth will benefit Brazil more in the long term. “It [the economic recovery] will be slow and protected,” Alberto Ramos, an economist at Goldman Sachs, told the Financial Times.

However, there are positive signals conducive to future growth in the country – high inflation, which has dogged the economy, is falling fast and is expected to hit the government’s 4.5% target this year. The sinking of inflation has allowed the central bank to carry out monetary easing. It cut rates by 75 basis points in January and another 350 basis points are anticipated this year. Cutting rates tends to boost the equity market.

If investors wish to take a punt on Brazil, there are five ETFs listed in Europe, with four of them tracking the MSCI Brazil Index. It covers 61 companies with around a third of the exposure in financials and grew 66.6% in value over 2016 in local currency terms.

The cheapest option is the $50m Amundi ETF MSCI Brazil UCITS ETF (LON: BRZ) at 0.55% per year. It has soared more than 95% over 12 months in USD terms.

The $321m iShares MSCI Brazil UCITS ETF (LON: IBZL) is more liquid but also more expensive at 0.74%. Listed in Sterling, the currency exchange has bolstered 12-month returns to a whopping 123.2%.

HSBC and Deutsche Asset Management also provide ETFs linked to the above index.

Tracking a different index, the Lyxor Brazil (IBOVESPA) UCITS ETF C-USD (LON: RIOU) costs 0.65%. In USD it has generated 105% over one year, and in Sterling (LON: RIOL) it has returned 132% over the same period.

Although Brazil is domestically-oriented, saving it from uncertain trade deals under new US President Donald Trump, risks do remain for investors in these funds. There is an election in October 2018 and it is up in the air as to whether the next candidate will continue the austerity programme of Timer and Meirelles.

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