Brazil ETF ‘EWZ’ Losing Its Step

June 10, 2013

The once-high-flying Brazil equities ETF ‘EWZ’ is coming back to earth.

Brazil is one of the largest emerging economies, and one of the world’s biggest producers and exporters of commodities, but it has been failing to deliver the outsized growth investors have come to expect from developing nations—a reality that’s clear in the performance of the iShares MSCI Brazil Capped Index Fund (NYSEArca: EWZ).

EWZ, the broadest U.S.-listed Brazilian equities ETF, with $7 billion in total assets, has now slipped 2.3 percent in the past week alone, putting losses at 10 percent in the past month. Shares of the ETF—now just under $50—are flirting with a one-year low of $49.07 a share—levels it hasn’t dipped to much in four years.

Investors are taking notice, and have already yanked from EWZ more than $2.5 billion from the fund since the beginning of the year. The ETF’s performance comes at a time when an investment in U.S. equities through, say, the SPDR S&P 500 ETF (NYSEArca: SPY) has returned about 16 percent so far in 2013.

And for now, the outlook seems more dim than bright. Brazil has several problems brewing, including sluggish growth, rising borrowing costs, relatively high inflation, growing government debt and a consumer base that seems reluctant to boost consumption despite government efforts.

“Brazil is quite an amazing turn of events,” Hahn Investments’ Tyler Mordy told IndexUniverse. “It was once a country darling and now nobody will dare to call a bottom.”

In fact, the Brazilian government recently reported first-quarter GDP growth of 1.9 percent year-on-year, failing to meet the already-modest market expectations for growth to reach 2.5 percent—and projected 2013 growth would be just shy of 3 percent. By comparison, the U.S. first quarter GDP expanded 2.4 percent year-on-year.

The most recent blow to the Brazilian economy came last Thursday from Standard & Poor’s, which lowered its outlook on Brazil’s sovereign debt. The ratings agency said that the increasingly negative outlook tied to slow economic growth and expansionary fiscal policy would likely lead to a downgrade of Brazil in the next decade, according to a report on the Financial Times.

“Fundamentals in Brazil put it squarely in the bottom 25 percent of our country model,” David Garff, managing director of Accuvest Global Advisors, told IndexUniverse recently, noting that momentum in that market in local currency terms is also negative. “The trailing 12-month price momentum in Brazil is down 3.5 percent.”

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