Proceed With Caution On Brazil ETFs

May 13, 2016

Brazil has decided to impeach its acting president, Dilma Rousseff, and place her under trial for illegally manipulating the country's finances. The much-awaited Senate vote, which took place late Wednesday, could, at least in theory, put investor concerns at ease.

So far this year, Brazilian equities have been strong performers in anticipation of the impeachment proceedings.

Under Rousseff’s leadership, which began in 2011, Brazil sank into a deep recession, facing economic contraction and an ever-growing corruption scandal that seems to reach just about everyone in a position of power.

Brazilian Rebound

By and large, the recent market action has supported views that an ouster of the hugely unpopular and business-unfriendly president would be good news for the country’s economy and market.

Consider the year-to-date performance of some of the largest Brazil equity ETFs year-to-date, including the $3.5 billion iShares MSCI Brazil Capped ETF (EWZ | B-96), up 41% year-to-date; and the $86 million VanEck Vectors Brazil Small-Cap ETF (BRF | D-56), up 31%, as the chart below shows:

Chart courtesy of StockCharts.com

These gains have come after the funds faced steep declines for the better part of two years. EWZ lost more than 50% of its value in 2014 and 2015, while BRF dropped more than 61% in the two-year period.

But the question remains as to whether these gains are the bona-fide beginning of an upward recovery, or whether they could prove nothing more than a false start for a country that still has deep structural problems to face.

It seems that the prevailing sentiment among market participants is cautiously optimistic for Brazil going forward, but there are three key points investors should consider before deciding to jump in ...

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