Why has the global downturn given Brazil and the exchange traded funds (ETFs) that track this emerging market an unusual tinge, resulting in an economy that is relatively in good shape?
The Economist states the following reasons why Brazil is doing better than most, even though some of these same reasons are factors that held back the economy:
- The heavy influence of the government in the financial sector. In fact, retail bank giant Banco de Brasil, the nation’s largest mortgage lender, Caixa Economica , and BNDES, a big development bank that feeds credit to favored companies are all controlled by the government. While the rest of the world is figuring out how to get a handle on banks, Brazil has been doing it all along.
- Hugely expensive bank loans, meaning fewer people in debt.
- Huge reserve requirements and taxes on funding that push up the price of loans discouraged private banks from taking wild risks and jumping on the bandwagon that some of its peers in Europe and the United States did.
- Public-sector debt is below 40% of GDP, previously a problem in the nation.
- Foreign currency borrowings have been exchanged for real dominated ones, so fluctuations in the Real will not hinder the government’s balance sheet; Brazil has actually built up a reserve of about $200 billion to defend its currency.
- The economic crisis isn’t pushing up inflation, which has been an ongoing problem in the nation. This has enabled the central bank to cut interest rates.
Keep in mind that it isn’t all sunshine and smiles in Brazil. The nation has been impacted severely by the global economic downturn. The job growth that the nation once boasted about has quickly reversed, industrial production in December fell by 12%, analysts are predicting absolutely no growth in 2009 and fiscal prudence that once was common place may no longer be.
It is just impressive that the nation has been able to defy its history of going into cardiac arrest when economies elsewhere fold; Brazil is known for being hypersensitive to the world economy.
If you want to grab exposure to the Latin American emerging market, take a look at iShares MSCI Brazil Index Fund (EWZ): down 4.3% year to date; up 5.5% for the last three months
For a bit more of a diversified play, there’s also the Claymore/BNY BRIC (EEB), which has 49.4% weighted in Brazil. Another 42.8% is weighted in China. It’s down 11% year-to-date.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.