Brazil country-specific exchange traded funds were testing their short-term resistance as the markets strengthened, despite calls of concern amid rising political risk ahead of the October presidential elections.
The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) rose 2.3% Friday and was testing its short-term resistance at the 50-day simple moving average. EWZ jumped 7.3% over the past week, but the fund is still down 17.2% year-to-date.
Analysts from Franklin Templeton to UBS Group AG warned that it may still be too soon to jump back into Brazil’s cheap markets as there are a few more weeks until the presidential elections, Bloomberg reports.
There is lingering concern that the October vote will bring in an extreme government, especially with moderates struggling for support.
After years of constant inflows, ETFs focused on Brazil experienced money outflows for two straight months on the heightened political uncertainty. EWZ saw $811.7 million in net outflows over the past two months.
Wary investors warned that the selling may continue
UBS projected the benchmark Ibovespa could fall another 15% from current levels. Franklin Templeton has shifted to commodity stocks to find assets insulated from the muddy political waters.
“A good part of the uncertainty is priced in, but to say Brazilian stocks will get a boost regardless of the election outcome is a different thing,” Frederico Sampaio, the chief investment officer at Franklin Templeton’s Brazil unit, told Bloomberg. “I look everywhere and see cheap prices. But is Brazil a value trap? The answer might be yes.”
Related: Brazil ETF Rises as Presidential Election Looms
Carlos Woelz, the co-founder of Kapitalo Investimentos and a Brazil hedge-fund manager who beat 98% of peers over the past five years, also argued that while companies are in a better position than they were a few years ago after deleveraging and rebuilding their balance sheets, there is too much going against Brazil now to be bullish, Bloomberg reports.
“A lot of bad news has been discounted in the prices, but I’m not very long right now,” Woelz told Bloomberg. “If we were at another point in the global cycle, I would face the political risk. If we were at a different point with the political risk, I would face the global cycle. But the two of them together are too much for me.”
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