Brazil ETFs Plummet; Value Play In Focus

March 13, 2015

Exposure to Brazilian equity ETFs has not been paying off in recent months, particularly since the presidential election there last fall resulted in another win for the incumbent leftist governing party. Yet, ETF investors seem largely unfazed by what has been an impressive decline in the once-darling South American economy.


The Dilma Rousseff years have become known for rampant corruption, the demise of oil giant Petrobras amid scandal, economic contraction—there was zero GDP growth in 2014—the rise of inflation now at the highest level in 12 years, and a decline in the local currency so steep that the Brazilian real is now nearing an 11-year low against the dollar. The ongoing weakness in global commodities markets isn’t helping either—Brazil relies heavily on its agricultural commodity exports.


Many locals are headed to the streets calling for Rousseff’s impeachment, fostering concern that her so-called austerity plans to get the country back on track might be dead in the water given the amount of political uncertainty. These certainly aren’t easy times for Brazil, though some investors do see a value play, even in the current mess.


The iShares MSCI Brazil Capped ETF (EWZ | A-97)—the largest ETF in the segment, with $3 billion in assets—is down more than 37 percent in six months. Even a currency-hedged alternative that should help insulate U.S. investors from the weakness in the Brazilian real isn’t doing much better.


The Deutsche X-trackers MSCI Brazil Hedged Equity ETF (DBBR | D-43) is down about 20 percent in the same period. The fund tracks a market-cap-weighted index of Brazilian firms covering the entire market-cap spectrum and hedged against Brazilian real exposure.


Chart courtesy of


Interestingly, assets have not been flocking out of these funds despite performance. EWZ has bled less than $70 million in net assets in the past six months, while DBBR is actually net positive, with gains of $2.4 million, data shows.


Valuations might be the very reason so many investors are holding on to their allocation. Brazil remains one of the largest emerging economies in the world, and a powerhouse in commodities.


Consider that a fund like Cambria Global Value ETF (GVAL | D-18) currently holds Brazil at the top of its holdings, with a 12 percent allocation, along with countries like Ireland and Spain.


GVAL sets out to own the most-beaten-down stocks in the world found in the most undervalued developed and emerging markets. The idea is to invest in what’s cheap, and avoid wealth destruction by owning what’s overvalued. Brazil-centered EWZ, for instance, has bled nearly half of its value in the past three years.


But beyond value, there’s little to like in Brazil, according to David Allen, vice president at Accuvest Global Advisors. Back at the time of the election last fall, Allen said in a blog that a “serious case can be made to invest in Brazil based on discounted valuation metrics, low risk and improving fundamentals and momentum.”


Big Changes In Short Time

Fast-forward six months: He now says fundamentals for Brazil have “declined substantially” since then.


“From my perspective, Brazil is still a great value option, but I don’t think the fundamental case is there anymore. Obviously, momentum has been bad over the last several months,” Allen told


“We only held that trade for a few months, and have been out of Brazil since the start of the year,” he added.


Accuvest, which ranks 40 countries in a model that looks at momentum, fundamentals, risk and value, currently has Brazil at No. 26, with its worst score being momentum.


That said, the firm believes there’s potential upside for Brazilian equities in the near term, and a positive fundamental outlook in the longer term based on several factors, which include:


  • Brazil has the 6th-weakest currency over the last three months; historically, this type of weakness has resulted in a near-term (next-one-month) recovery in equity prices that is significantly higher than the average country and the ACWI index
  • Brazil has the 9th-highest long-term expected EPS growth
  • Brazil has the 13th-highest long-term sales per share trend
  • Brazil’s risk ranking improved five spots from February to March


Whether you are a value investor looking for an opportunity in a beaten-down market, or a believer in the long-term outlook for Brazil, if you can’t stomach volatility, no need to apply. 


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