Brazilian markets and country-related exchange traded funds are stuck in a slump and the ongoing domestic troubles could continue to weigh on the emerging market.
The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, has declined 22.3% over the past three months and is hovering around a 10-month low.
While improved family consumption and lower interest rates have helped support the Brazilian economy in the first quarter, labor strikes and political risks continue to weigh on the outlook for the rest of the year, Bloomberg reports.
Things Are Not What They Seem
“More than half of growth in the quarter came from accumulation of inventories,” Alberto Ramos, chief Latin America economist for Goldman Sachs, told Bloomberg. “This shows demand grew at a slower pace than supply and this doesn’t bode well for growth in coming quarters.”
Supporting the first quarter numbers, consumer spending, which makes up almost tow-thirds of demand, rose 0.5% over the first three months. Domestic consumption was supported by monetary easing that helped push benchmark interest rates to all-time lows.
“It’s less bad than expected, but I think it’s difficult to celebrate the result,” Jankiel Santos, chief economist at Haitong, told Bloomberg. “Domestic demand was slightly better than expected, primarily with the participation of investments above what we imagined.”
However, the Brazilian economy has been struggling to step out of the recession it experienced a year ago. The tenuous circumstances are further exacerbated by a paralyzing trucker strike that depressed growth this year. Meanwhile, unemployment is still in the double digits.
Furthermore, a cloud of uncertainty lingers over Brazil ahead of elections and a more adverse scenario for emerging markets in general.
Economists surveyed by the central bank have lowered their 2018 gross domestic product outlook to 2.5%, or 0.4 percentage points lower than the four months prior. The recent trucker strikes has also lead to Alfredo Coutino, Latin America director for Moody’s Analytics, to lower 2018 growth expectations to 2%, with knock-on effects potentially dragging it even lower.
“This uncertainty and volatility facing the country will have an impact on investor decisions and also consumer decisions,” Coutino said before release of the data, adding that delayed investments would exacerbate an existing problem. “There has been a recovery in the Brazilian economy, but investment continues to be insufficient to sustain a prolonged recovery.”
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