Take ‘B’ Out Of BRIC For Now

March 08, 2012

Brazil was the best-performing BRIC market over the past year, but that may be about to change.

Outperformance probably didn’t mean much to investors when everything was in the red, but for the record, Brazil was the best of the BRICs in 2011.

The iShares MSCI Brazil Index Fund (NYSEArca: EWZ) lost about 9 percent last year—less than the other three BRICs, Russia, India and China, and 3 percentage points less than the iShares MSCI BRIC Index Fund (NYSEArca: BKF) that folds them all into one ETF.

The bad news is that the outlook for South America’s biggest economy is heading south, and 2012 is likely to be far worse than 2011.

So, it may be time to change course.

EWZ/MCHI/INDY/ERUS/BKF Performance, March 2011 - YTD 2012

The Brazilian economy, once one of the bastions of hope for the world’s economy, grew at a sub-Canadian 2.7 percent clip last year—a far cry from the explosive double-digit growth it was supposedly destined for.

To put that in context, Brazil grew 7.5 percent in 2010, and had a 4.2 percent average annual growth rate between 2005 and 2010—a period that included the disastrous credit crisis of 2008-2009. In other words, the trend seems to have reversed.

Making matters worse, Brazilian industrial activity contracted 0.5 percent in the fourth quarter of 2011.

Sure, the economy grew as a whole by 0.3 percent in the fourth quarter after contracting in the third quarter, offering some glimmer of hope for a turnaround.

And sure, Brazil will host the World Cup in 2014 and the 2016 Summer Olympics—two events that could bring short-term economic growth to the area. The problem is that returns from such events are typically fleeting and the infrastructure improvements are not the economic panacea most claim them to be.

The reality is, without any improvement in manufacturing, it’s hard to foresee Brazil providing the returns that compensate U.S. investors for the risk of investing in such a volatile market.


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