ETF Of The Week: ‘EWZ’ Up On Brazil Vote

October 12, 2018

This has been a busy week for the markets. Price action, asset flows in and out of various segments, bond yields, you name it, things were on the move. One particular spot stood out: Brazil.

The economically and politically embattled South American country—one that has made countless headlines about corruption scandals involving every level of the government—went to the polls on Sunday, Oct. 7, to elect a new president.

That vote yielded a significant lead for far-right candidate Jair Bolsonaro, who now battles the second-most-popular candidate, left-leaning Fernando Haddad, for a simple majority in a second runoff vote on Oct. 28.

The outcome of the first round of the election buoyed Brazil ETFs across the board. The largest of these funds, the iShares MSCI Brazil ETF (EWZ), has rallied more than 21% in the past week, according to our data. Two other Brazil equity ETFs were also among the week’s top performers:

 

 

Reform-Friendly

“We see Bolsonaro’s unexpectedly strong showing in the first round leading to a near-term rally in Brazilian assets, given his economic team’s perceived market-friendly orientation,” BlackRock’s Isabelle Mateos y Lago said in a blog this week.

She noted that much of the market reaction centered on Bolsonaro’s apparent commitment to reform—the same ongoing reform agenda that has helped Brazil begin to stage an economic recovery in recent months.

EWZ tracks a market-cap-weighted index of Brazil companies covering the entire market-cap spectrum. The fund is big—relative to its peers—with $6.7 billion in total assets, and it’s hugely liquid, trading on average more than $1.1 billion a day. EWZ costs 0.62% in expense ratio, or $62 per $10,000 invested.

Plenty Of Risks Ahead

While recent gains have been notable for Brazil ETFs in general, EWZ and its counterparts have had a tough go this year, and remain in the red for 2018, as the chart below shows:

 

Chart courtesy of StockCharts.com

 

“Brazilian assets’ longer-term prospects will hinge on the new government’s ability to implement reforms,” Mateos y Lago said, noting the government’s need to tackle Brazil’s “debt dynamics.”

“The Brazilian economy remains in a fragile state despite recovering from a 2015-2016 recession,” she said. “The conclusion of the Brazilian election will mark the end of a string of contentious Latin American political matches. We remain risk-on and see the lifting of political clouds in emerging markets supporting the long-term case for EM assets.”

This week’s rally in EWZ has been met by muted asset flows, according to our data.

Contact Cinthia Murphy at [email protected]

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