Accuvest, a Walnut Creek, Calif.-based registered investment advisor, uses the model to build its equity asset allocation portfolios using single-country ETFs designed to guide country-specific exposure. It looks at four factors: fundamentals, momentum, risk and valuation.
Brazil’s risk and valuations—it’s still cheap relative to peers—are positive, “but the degree to which fundamentals and momentum are negative drags Brazil down to 24th out of 28 countries,” Garff said.
The local equities market—as measured by the broad Sao Paulo Bovespa index—is reflecting the negative outlook. It’s down more than 13 percent year-to-date in what amounts to the worst performance among major Latin American markets so far in 2013.
Garff’s firm is actually short Brazilian equities, and before he changes that, he’d need to see fundamental improvement as reflected by leading indicators such as acceleration, earnings growth, sales growth, return on equity.
“It’s important to keep the big picture in perspective,” Mordy said. “Most emerging markets are simply going through a cyclical adjustment, while developed markets are undergoing structural adjustments.
“Brazil is no different than most other emerging markets,” he added, noting that the downturn the country has seen has been exacerbated by a global downtrend in commodities—Brazil’s bread and butter.
Other Brazil-focused ETFs caught in the downdraft include a pair of small-cap focused strategies—the $52 million iShares MSCI Brazil Small Cap Index Fund (NYSEArca: EWZS) and the $355 million Market Vectors Brazil Small-Cap ETF (NYSEArca: BRF), which have year-to-date declines of 13.2 and 16 percent, respectively.
In the longer term, however, Mordy argues that prospects are good, as Brazil—like other emerging markets—continues to further integrate itself into global supply chains, while its population sees rising income and standard of living.
“These shifts take time,” Mordy said. “We are only in the foothills of a long journey.”
“Emerging [markets] is getting cheap,” he added. “Just like ‘value stocks,’ many of these countries now have a huge margin of safety. We are fairly close to a great buying opportunity.”