ETF Trends
ETF Trends

Brazil’s economy and stock exchange traded funds will continue to drag their feet as weakening consumer spending could prolong the ongoing recession.

May retail sales in Brazil declined 0.9%, the fourth consecutive dip after a revised 0.5% drop in April, as an increasing unemployment rate, accelerating inflation and near record-low consumer confidence weigh on the economy, reports David Biller for Bloomberg.

“We do not expect a recovery of retail sales anytime soon,” Bruno Rovai, Brazil economist at Barclays Plc, said. “The labor market deterioration should continue for the next few quarters, consumer sentiment remains in the doldrums and the tightening of monetary conditions does not support the credit market.”

The Global X Brazil Consumer ETF (NYSEArca: BRAQ), which includes a 36% tilt toward discretionary and 50.5% position in staples, has declined 16.0% year-to-date while the broader iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) fell 9.2%. EWZ holds a hefty 20.4% position in consumer staples and 6.4% in consumer discretionary.

Moreover, Goldman Sachs Group Inc.’s chief Latin America economist Alberto Ramos argues that the high household debt levels, tighter credit market, higher taxes and increase in tariffs are further weighing on consumers.

“People are more defensive, they are more uncertain about the outlook for the economy and their own lives,” Ramos told Bloomberg. “Their inclination to spend on big-ticket items like an automobile, a flat screen television, or even an expensive vacation has been reduced.”

The country has been grappling with runaway inflation levels, and the central bank has already hiked borrowing costs six times in the face of recession. The benchmark Selic sits at 13.75% and economists anticipate the central bank could hike rates to 14.5% by the end of the year as the economy shrinks 1.5%.

Consequently, Goldman Sachs is predicting a deeper recession in 2015, with the economy contracting 1.5% in the second quarter, compared to previous estimates of a 1.25% contraction. For 2015, the bank projects a 1.4% recession.

iShares MSCI Brazil Capped ETF

For more information on Brazil, visit our Brazil category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.