Sizing up the stock bounce in Brazil
With Rio 2016 in full swing, everyone’s att e nti on is focused on the athletes’ daily displays of talent, grit and competition and the inspirational stories that come along with them. It is as it should be when the summer Olympics are on.
Turning to Brazil’s economic backdrop, however, one finds a story that is not quite so inspirational. The country is suffering through its worst recession in decades — some are even suggesting it is in a depression — and has been plagued by political and business scandals. These challenges are even more onerous than those involved in preparing for the Games, which included significant water quality issues for open water events, not to mention the Zika virus, a concern all its own.
From an investment perspective, the context appears anything but encouraging, and so it likely will come as a surprise to many that the iShares MSCI Brazil ( XBZ) has enjoyed rather stellar performance (+51.7 per cent) year-to-date.
The XBZ, with only 11 million in assets under management, tracks the much larger ( US$ 3.9- billion) U. S.based iShares MSCI Brazil ETF, which trades under the ticker symbol EWZ. Single country ETFs that trade in Canada tend to be relatively small, due to the size of our ETF market relative to that in the United States, and some, such as the iShares MSCI Latin America index ETF have even been wound down as a result.
But the Canadian versions can offer advantages, including avoiding costs incurred during currency conversion, and potential tax considerations.
While the XBZ offers 100 per cent exposure to Brazil, there are other ETFs that can offer a chance to play the country in more limited format.
The iShares MSCI Latin America (ILF:US), which has more than US$ 820 million under management, comes with a 54 per cent Brazil exposure and is up nearly 24 per cent year- to- date. Another option is the Canadian traded iShares Broad Emerging Markets Index FUND ( CWO), which is about one quarter exposed to Brazil and had jumped 16 per cent this year.
Interestingly, since CWO is a value- based ETF, its Brazil “content” is markedly higher than that of some other emerging market ETFs. For investors looking for a Value-tilt / Smart Beta ETF, CWO provides the greater breadth of country exposure of an emerging market ETF but with about the same exposure to Brazil.
Yet another option hearkens back to better times for Brazil. Those would have been the Lula days when BRIC countries (Brazil, Russia, India and China) were seen l eading the world’s economic and population growth. From an Asset under Management perspective, the peak came in March 2011, when the iShares BRIC ( CBQ) saw its assets exceed $ 370- million — today they sit at less than 1/5 of that.
What is this telling us? That the good old days, as far as the BRIC thesis, are gone. Ask Goldman Sachs, whose chief economist coined the acronym in the early 2000, and who, earlier this year, shuttered a BRIC fund they had been offering, after performance flailed and assets melted away.
Back to Brazil: While its year- to- date performance could be seen as a dead cat bounce, it likely reflects the fact that stocks there that had been given up for dead are seeing some positive actions taken, hopefully opening up the way to better days. Think scandal- plagued Petrobras, for instance, whose yearto- date performance is just about +100 per cent.
What we have now, arguably, is a contrarian play, one which may still have legs, but with the usual “past performance is no indication of future performance” caveat. Should you chase Brazilian stocks after their spectacular run to- date? Probably not if you don’t appreciate that the risk side of Brazilian investments could still be considerably greater than those commonly faced by buyers of Canadian or U. S. stocks. ( The standard deviation, for instance, is more than three times that for Canadian stocks.)
That said, if you think recent gains could extend further, relative valuations are on your side, since even after their strong showing this year, stocks there are trading at P/ E levels of 13X, relative to those of the TSX (16+), the U. S. ( 20X+), or their Emerging Markets counterparts (17X+).
THE GOOD OLD DAYS, AS FAR AS THE BRIC THESIS, ARE GONE.