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Brazil ETFs Surge, But Can It Last?

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2013 has been pretty rough to emerging markets around the globe, but it has been downright horrific in the Brazilian market. The country has seen its markets plunge by 25% by some dollar-denominated measures, and with protests and inflation across the nation, there could be more pain ahead for Brazil.

However, the nation’s top ETFs did start this week on a solid note, with funds tracking the country rising about 3% across the board. The main catalyst for this bump, beyond some bargain hunting, was undoubtedly the strength of the real against the greenback and expectations for the country’s central bank to aggressively fight inflation.

The country recently bumped up its benchmark rate by 50 basis points for the second straight meeting, and analysts have moved their 2014 target for the Selic rate as well. Now, analysts are looking for a 9.5% Selic rate next year, up from the previous consensus of 9.25% and the current level at 8.5% (see Behind the Crash in Brazil ETFs).  

Beyond that, there was also some optimism from the country over some solid China data. The country’s GDP growth rate slowed down less than feared, which is very important considering that the nation is Brazil’s largest trading partner, helping to buoy most of the many commodity focused names that trade in Brazil.

Brazil ETF Impact

The better-than-expected China data and some more hopes for a stable real were good news for beaten down Brazil ETFs on the day. The top fund in this segment, the iShares MSCI Brazil Capped ETF (EWZ - Free Report) , rose by 2.8% on the session while its small cap counterpart, the Market Vectors Brazil Small-Cap ETF (BRF - Free Report) , had an even better day, adding about 3.5% (see the full list of Top Ranked ETFs).

Other less popular Brazil ETFs also experienced bullish trading days, with 3% gains pretty common. However, it is worth noting that volume was pretty light across the board, as less shares than a normal session—by a relatively wide margin—changed hands in Monday trading.

Better Days Ahead for Brazil ETFs?

Given this solid session, many investors might be thinking that this is the bottom for Brazil ETFs. After all, the ETFs tracking the nation have cratered, leaving many securities as intriguing value propositions for those with a high risk tolerance (See Brazil ETFs Crushed by Downgrade, Currency Woes).

However, this could be a value trap, as Brazil is still facing some very big questions about its economic growth outlook and how the nation can get back to normal. In fact, Brazil is currently growing slower than many of its counterparts, not just in the developing world, but compared to traditionally slow growing developed ones as well, with growth projections coming in below 3% for 2013 GDP.

And with such a big portion of the country’s growth tied to commodities, it is hard to envision a bullish scenario for the country without stronger support from other big emerging markets. In this type of environment, Brazil will have to rely on its consumer to power growth, but with rising rates and high inflation, this will probably not happen either, suggesting that Brazil still has a long way to go to get back to strong growth.

Bottom Line

For this reason, we are maintaining our sell recommendation on most Brazil ETFs, and especially those that have a consumer focus or ones that are dependent on strong commodity prices. Both of these sectors look to face more weakness in the months ahead, particularly if any more issues hit China, or if the latest rate hike fails to curb inflation (read Winning ETF Strategies for the Second Half of 2013).

So consider the recent surge in Brazil ETFs a good exit opportunity, or a time to go short in the big funds of Brazil that look to be the most impacted by the current market environment. Otherwise, you could see more losses in this troubled emerging market, which will definitely face more than a few bumps in the road before it can get back to being an investor darling once more.

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