Highly Anticipated Pension Reform Could Lift Brazil ETFs

A cornerstone of Brazilian President Jair Bolsonaro’s campaign was reforming the country’s pension system. It was those expectations, among others, that lifted the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) and the VanEck Vectors Brazil Small-Cap ETF (NYSEArca: BRF) following Bolsonaro’s elections.

Much of the optimism surrounding EWZ and Brazilian stocks earlier this was attributable to Bolsonaro’s plan to reform Brazil’s pension system. The country’s pension system is in dire need of reform, including potential increases to retirement ages. Many Brazilians are retired by their mid-50s.

Bolsonaro has promised wide-ranging reforms aimed at stomping out corruption in Latin America’s largest economy. His ability to make good on the promised reforms is seen as pivotal to the fortunes of Brazilian assets in 2019.

“A pension breakthrough could open the gates for reforms of Brazil’s dysfunctional tax system and sclerotic labor regulations, not to mention igniting private investment and leaving the central bank room to cut interest rates,” reports Craig Mellow for Barron’s.

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BRF seeks to replicate the price and yield performance of the MVIS Brazil Small-Cap Index, which includes securities of Brazilian small-capitalization companies. A company is generally considered to be a Brazilian company if it is incorporated in Brazil or is incorporated outside of Brazil but has at least 50% of its revenues/related assets in Brazil.

New Brazilian President Jair Bolsonaro has made privatizing state-owned companies and overhauling a costly pension system both key points in his administration as a way to cut down the soaring public debt and regain foreign investors’ confidence in the Latin American economy.

Brazil’s pension system is in dire need of reform because the country’s average retirement age is far lower than in OECD countries. The average retirement age for Brazilian men is 56 years old and 53 years old for women compared to 65.5 years old in OECD countries.

Brazil’s government has previously put money into the pension system to shore it up, but given the fragile nature of the government’s finances, increasing fiscal deficits could be viewed as unappealing by investors.

“The cautious outlook reflects memories of 2017, when pension reform seemed on the verge of passing until prosecutors charged then-president Michel Temer with corruption and racketeering,” according to Barron’s. “Similar shocks to the system are possible this time around, notably from embezzlement probes swirling around Bolsonaro’s son Flavio, a senator representing Rio de Janeiro.”

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