- Beaten up and vilified Latin American ETFs are rebounding
- 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
An encouraging sign among rebounding emerging markets stocks and exchange traded funds this year has been the participation of previously beaten up and vilified Latin American shares. For example, the iShares Latin American 40 ETF (NYSEArca: ILF) is up 14.1% year-to-date after being one of the worst-performing regional ETFs over the past couple of years.
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]
Brazil and Mexico are the largest country weights in ILF, but the good news is ETFs tracking both countries are rebounding.
Earlier this month, Brazilian shares jumped as many traders believed the country is moving past a political gridlock that could lead to changes in the government and potentially kick-start the stagnate economy, Bloomberg reported.
The Brazilian rally went into high gear after former President Luiz Inacio Lula da Silva was detained, adding to speculation that support will grow to impeach his successor, President Dilma Rousseff.
“Be it on aggregate debt to GDP, corporate debt to equity, free cash flow, ROIC or Altman Z score, LatAm fares poorly against EMEA and Asia… that said, by no means are we suggesting more bearishness on LatAm… LatAm companies’ margins have melted away to a 20-year low… a high capex-to-sales ratio has taken ROIC to a two-decade low, drying up FCF… the good news is, LatAm firms cut capex 22% in 2015 and are expected to further lower it… still, we continue to prefer Asia over LatAm,” according to a Citigroup note posted by Teresa Rivas of Barron’s.
Last month, Mexico’s central bank surprisingly boosted interest rates, a move that has helped the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) trade higher.
iShares Latin American 40 ETF
