The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is up 12.1% over the past 90 days, but the fund’s one-month performance paints a different picture as the largest Brazil ETF is off 8.4% over that period.
Slack GDP estimates and a tumbling real are among the downside catalysts pressuring Brazilian stocks and EWZ. Brazil’s planning ministry attributes a major portion of the turn to the projected depreciation of about 21% in the real currency against the U.S. dollar. The ministry expects the real to end 2015 at R$3.22 from R$2.66 at the end of 2014. The real is already traded at a high of about R$3.29 back in March. [Brazil ETFs Brace for Slowdown]
Reflecting the deteriorating economic conditions, the country’s unemployment rate hit 6.4% in April, its highest in four years. Inflation is expected to rise to 8.26% at the end of the year and has also breached the central bank’s upper band of 4.5% plus or minus 2 percentage points.
Inflation in Latin America’s largest economy is also stubbornly high at 8.47%, nearly double the government’s target rate of 4.5%. That means Brazilian interest rates, already among the world’s highest at 13.75%, could easily move to 14%. However, that could also represent the end of the selic rate’s rise.
“And rate-sensitive stocks, from banks to consumer-discretionary names, do well as interest rates fall. Indeed, Morgan Stanley studied 15 interest-rate-sensitive Brazilian stocks that declined 60% over the past two years of monetary tightening. As the cycle reverses, select rate-sensitive names including airplane maker Embraer (NYSE: ERJ) could start to outperform,” reports Dimitra Defotis for Barron’s.
Rebounding Brazilian financial services shares would be a boon for EWZ because the ETF allocates 31.1% of its weight to that sector. Consumer discretionary names account for 6.5% of EWZ’s weight while industrials, another sector likely to benefit if the selic rate falls, are 5.4% of the ETF’s weight. [Brazil ETFs Try to Perk Up]
Some investors have grown tired of waiting around for a prolonged run of bullishness for Brazilian stocks and ETFs. On the other hand, recent options activity indicates some traders are either hedging short positions in the ETF or betting on a pop by the fund.
“With more than $435 million leaving the fund via redemption activity in the trailing one month, making nearly $1 billion out of the fund year to date, we witnessed December 37 call buying in the product, with more than 35,000 contracts changing hands,” said Street One Financial Vice President Paul Weisbruch in a note out Monday.
iShares MSCI Brazil Capped ETF
