Latin American stocks and exchange traded funds have been among the most out of favor corners of the emerging markets group and that is saying something because developing world equities have been out of favor with investors for several years now.
Investors’ distaste for Latin American equities is reflected in the iShares Latin American 40 ETF (NYSEArca: ILF), which has tumbled 30% over the past year. Amid a corruption scandal at Petrobras (NYSE: PBR), Brazil’s state-run oil company, high interest rates, a rising current account deficit and slack economic growth, Brazil stocks and ETFs have languished.
According to JPMorgan Asset management, Colombia and Mexico are now members of the so-called fragile five group of emerging markets, edging out Brazil and India, reports Steven Johnson for the Financial Times.
The two Latin American countries, along with Turkey, South Africa and Indonesia, are seen as developing countries overdependent on volatile foreign investment flows. Brazil and Mexico, Latin America’s two largest economies, combine for the bulk of ILF’s geographic weight.
“The $495 million iShares Latin American 40 ETF had $33.8 million in withdrawals last month, according to data compiled by Bloomberg. That’s the largest outflow since January 2015. It has tumbled 32 percent in the past 12 months, compared with a 22 percent drop for the iShares MSCI Emerging Markets ETF for developing nations,” reports Chiara Vasarri for Bloomberg.
As an oil exporter, Mexico’s currency has been hit by the falling crude oil prices – ETF investors should keep in mind that while Mexico has a large oil industry, none of the country-specific ETFs include exposure to the sector. However, Mexico’s commodities exposure has not punished EWW as harshly as falling commodities prices have done to the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).
Multiple factors are dragging on the Brazilian economy. Unemployment rose to 7.9% in September from 4.7% in October last year. Inflation has jumped over 10% for the first time since 2002. The budget deficit has widened to 9.5% of GDP. Additionally, lower commodity prices, diminishing consumer credit boom and a corruption scandal at state-run oil giant Petroleo Brasileiro have all weighed on the economy. [Corruption Probe Plagues Brazil ETF]
Slumping commodities prices are also “getting analysts predicting another year of economic contraction for the region at a time when the global activity is forecast to grow 3.3 percent, according to data compiled by Bloomberg,” reports the news agency.
iShares Latin American 40 ETF
