For the last decade, Brazil has been an emerging super power, building in infrastructure and opportunities for nearly 40 million impoverished citizens to work their way into the middle class. But a shift is working its way through the economy; rising inflation, debt, and a weakening currency have stripped many in the middle class of that title. The tension boiled over last week when a small protest against bus-fare increases was brutally squashed by the police force, and now people have taken to the street in droves to protest their government’s spending practices [see Single Country ETFs: Everything Investors Need To Know].
Over 30,000 people marched in in Rio de Janeiro Monday night and more in other major cities. President Dilma Rousseff is at her lowest approval rating ever and World Cup officials are reportedly debating if Brazil can handle the massive game set for next year. Once an obvious choice for investors, Brazil is quickly falling back into a pattern of poverty and crime that defined the country in previous decades.
How To Invest in a Distressed Brazilian Market
Over the trailing one-year period, iShares’ MSCI Brazil Capped ETF (EWZ, A-) has fallen nearly 6.89%; year-to-date the fund is down 15.30%. The ETF’s 200-day volatility comes in at 17.85%, while its five-day volatility has surged to over 36.69% (data as of 6/18/2013).
As one of the first emerging markets to take off and slow down, Brazil has not seen an outstanding year of returns since 2009, when EWZ brought in an outstanding 122.43% gain; however, with the reconstruction of developed markets, Brazil has slowed, only returning 0.42% in 2012 [see Euro Free Europe Portfolio].
Before investors write Brazil off as a bad investment, they should note that this emerging market has a decade of exponential growth behind it. While the country may no longer be the return-heavy investment it was, the economy has shown its capacity to grow, and some investors could see this drop in prices as an opportunity for a cheap investment. For those thinking this may be a prime buying (or shorting) opportunity, here are a few different angles to play Brazil:
- MSCI Brazil Capped ETF (EWZ, A-): Offering the largest play at the Brazilian equities market, this fund is nearly 13 years old and has a strong history of returns behind it.
- Dreyfus Brazilian Real Fund (BZF, A-): The only ETF currently offering exclusive exposure to the Brazilian Real, BZF will be one of the first funds to react if the Brazilian economy picks back up or falls further.
- Latin America 40 Index Fund (ILF, A): Those looking for hedged exposure to Brazil should consider ILF a strong contender, featuring a 50% weighting to Brazil, but also strong holdings in growing Latin economies such as Mexico, Chile and Peru.
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Disclosure: No positions at time of writing.