Just when it looked safe to tip-toe back into the waters of Brazil exchange traded funds that situation has rapidly become unappealing.
From the start of September through Oct. 22, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest Brazil ETF by asset, surged more than 20%. Along the way, EWZ erased the bear market it entered earlier this year, one induced by the global commodities slowdown, fears about China’s economic strength and speculation of Federal Reserve Tapering. [Worst Global Markets by ETFs]
More than half of those gains have evaporated as EWZ has plunged 11.2% since Oct. 23. That includes Tuesday’s 1.4% loss that occurred on volume that was more than 50% above the trailing 90-day average. EWZ is not the only Brazil ETF offender. The Market Vectors Brazil ETF (NYSEArca: BRF) lost 0.7% on above average volume Tuesday and is now lower by almost 9% in the past month.
The Global X Brazil Consumer ETF (NYSEArca: BRAQ) is also off almost 9% in the pats month. In November, Citigroup sounded a bearish tone on Brazilian retailers, saying “Slower demand presents top-line risks for Brazilian retailers exposed to the mid- and lower-income segments. Moreover, inflation could push operating expenses up while rising interest rates pressure financial costs for leveraged companies.” [Citi Tepid on Brazilian Consumer Stocks]
Muddling the near- to medium-term outlook for Brazil ETFs was news out Tuesday that Latin America’s largest economy shrank 0.5% in the third quarter. That is the first contraction for Brazil’s economy since 2009.
Making matters worse for Brazil is the fact that emerging markets such as China, India and Mexico saw growth rebound in the third quarter. At the ETF level, investors allocated cash to China and India funds last month, but continued pulling capital from Brazil ETFs, according to BlackRock. [Emerging Markets ETFs Hit by November Outflows]
EWZ has lost almost $3.6 billion in assets this year, making it one of the 10 worst ETFs in terms of outflows. Investors have pulled almost $221 million from BRF.
“Brazil is out of step due largely to heavy government stimulus over the past year that is starting to lose steam,” reports Reuters. Translation: The government’s best efforts to rejuvenate the once shining economy have yielded little in the way of tangible results.
High interest rates plus slack growth equal stagflation and a weak currency is crimping consumer spending. The WisdomTree Brazilian Real ETF (NYSEArca: BZF) is down 4.6% in the past month and the real’s weakness comes as the cost of imports in Brazil remains alarmingly high. For example, the Playstation 4 costs more than quadruple in Brazil what it does in the U.S., according to Reuters.
Some market observers believe an official recession in Brazil is unlikely, but should that scenario come to pass, it could put the country at risk for a credit rating downgrade. In October, Moody’s pared its outlook on Brazilian sovereign bonds to stable from positive while affirming the credit rating. Brazil currently has an investment-grade rating. [Bond ETFs Vulnerable After Moody’s Changes View on Brazil]
EWZ is trading 8.5% below its 200-day moving average and at its lowest levels since September.
iShares MSCI Brazil Capped ETF
