ETF XRAY

Brazil Joins Sovereign Wealth Club

By Carl Delfeld of the Chartwell ETF Advisor

Brazil and its exchange-traded fund (EWZ) have come a long way. From a run on its currency and dwindling foreign exchange reserves to an appreciating currency and the formation of a soveriegn wealth fund. However, like everything political in Brazil, even this good news does not come without controversy.

Jonathan Wheatley in São Paulo reports for the FT that the original plan had the SWF drawing on Brazil’s foreign reserves, which have risen quickly this year to about $180bn. That plan sparked a behind-the-scenes row between the finance ministry and the central bank and the government’s commitment to Brazil’s floating exchange rate regime.

“The big victory for the central bank,” a central bank official said, “is that the fund will have nothing to do with Brazil’s foreign reserves and nothing to do with the central bank.” But in an interview with the FT in Brasília last week, Brazil's Finance Minister Mr. Mantega said the fund would indeed affect the accumulation of reserves and would share the central bank’s source of funding at the national treasury.

Under current rules intervention in currency markets is the sole prerogative of Brazil’s central bank. It is unlikely that Brazil's current $180 billion of foreign exchange reserves would be used wisely to increase demand for dollar assets.

Learn more about Brazil and its ETF by joining the Chartwell ETF Advisor.

iShares MSCI Brazil Index (EWZ)

Of the three ETFs in the region of Latin America Brazil’s EWZ has recently reversed into a column of O’s. Since January 07 Brazil has moved from $48 to its current position at $60.50 for a +26.04% gain. EWZ will break a triple bottom if it hits $56.

DE Smith of MyPortfolioView

Brazil Beats China for Fund and ETF Investment Flows

During the last week in May, investment flows into emerging markets by global equity managers and exchange-traded funds tracked by EPFR Global tilted toward Latin America and in particular Brazil at the expense of China.

The $789 million that investors committed to Latin America funds and ETFs was driven in part by a reassessment of Brazil’s economic prospects following its latest ratings upgrade. That upgrade, allied to falling interest rates and the government’s willingness to at least entertain the idea of rationalizing Brazil’s tax system, point to some positive surprises from the region’s biggest economy during the second half of the year. Brazil equity funds took in $280 million, their best showing in percentage terms since the last week of January, 2006. But investors still expect some negative surprises from the biggest economy in the Asia ex-Japan universe: they pulled another $354 million out of China and Greater China funds as the Chinese government continues its effort to rein in the country’s red hot economy and its booming equity markets.

In addition, EPFR Global reports that year-to-date flows into Emerging Markets bond funds pushed over the $3 billion mark. Global and Pacific Equity, Utilities Sector and High Yield Bond Funds also extended their winning runs as the spread between US Treasuries and JP Morgan’s benchmark EMBI+ index narrowed to a new record low of 153 basis points. But China and Japan Country funds and ETFs remained out of favor, although the pace of outflows slowed somewhat, and funds geared to interest rate sensitive sectors were hit with further redemptions.

By Carl Delfeld of the Chartwell ETF Advisor

Latin American ETFs Stand Out

Latin American exchange-traded fundsand the benchmarks they track havel managed to stand out with impressive gains this year.

The big two markets, Brazil and Mexico, followed by Chile, have already gleaned double-digit gains less than halfway through the year and have each set new record highs in the past week. The iShares Latin America ETF (ILF) has 88% of its basket directed at Mexico and Brazil. Brazil has for some time been the most overweight country in global equity manager's emerging market portfolios. Strong exports, higher foreign exchange reserves, high commodity prices, political stability and better corporate earnings plus reasonable valuations compared with other emerging and developed markets have all helped propel these markets higher.

Both country's also have stronger balance sheets and some outstanding companies in their ETF baskets such as American Movil and Cemex for mexico. Chile is also known as the star of Latin America for its pro-market policies and the tiny Peru market is the best performing market in the world so far this year.

Michael Mackenzie of the FT reports that Mexico’s Bolsa index of 35 companies has risen 13.3 % this year , while Chile’s Stock Market Select index of 40 companies has rallied 20.4 %. Leading the pack is a 78% rise in Peru’s 34-member index

By Carl Delfeld of the Chartwell ETF Advisor

Brazil Leads Emerging Market Allocations

It may surprise you that based on recent data from EPFR Global of global equity managers including investments in ETFs, that Brazil not China is the country that has the largest allocation. The iShares MSCI Brazil ETF (EWZ) is up 19% year-to-date.

China in fact remained the biggest underweight at 2.44 % followed by Taiwan, Korea, Chile, Israel, Russia and Poland. Brazil, the leading fund overweight, saw its average overweight climb 6 basis points to 2.09%. Turkey, Indonesia, Malaysia and Mexico rounded out the top five underweights among EPFR-tracked funds. . Despite its economic and political missteps, Thailand remained among the ranks of the overweights going into April. And it was joined by Hungary, a regular underweight in recent years due to its large current account deficit.

Thanks to is soaring equity market Brazil stood out in what was otherwise another month of modest month-on-month shifts for country allocations among the major emerging markets fund groups. Brazil’s average weighting was up 101 basis points among Latin America Equity Funds. The volatility shown by key Chinese indexes during March had a modest impact: its average weighting was up 4 basis points among global equity funds and down 49 points among Asia ex-Japan Funds. Both of these fund groups cut their average Taiwan weighting by over 30 basis points, bringing it down to its lowest level since the third quarter of 2004.

By ETF Daddy

Brazil ETF Reflects its Strengths/Weaknesses

The Brazil exchange-traded fund (EWZ) is one of this year's top performing country ETFs and has made many investors a lot of money over the past few years. But despite progress on many fronts, serious impediments to growth remain.

On the positive side, exports are booming, it has FX reserves of over $100 billion, inflation is muted at 3%, the country is a vibrant democracy and, unlike India, it has no serious disputes with neighbors. Still, its economic growth rate over the past four years has averaged just 3.3% versus 7.3% for emerging markets as a whole. Why?

First, it has very weak infrastructure with transport costs consuming 13% of GDP (8% in US), a big spending federal government, corruption and red tape are atrocious and labor laws inflexible. It has weak parties and fragile coalitions leading to no mandate for reform. Most worrisome is its performance in education with almost 50% of its ten year olds functionally illiterate.

My view is that the Brazil glass is 2/3 full - with only incremental, marginal improvements in the above areas, Brazil's growth rate could jump.

The Economist has an excellent survey of Brazil which I encourage you to read.

By Carl Delfeld of the Chartwell ETF Advisor

Follow President Bush Down South With ETFs

The Economist describes President Bush's trip to Latin America this week as his "spring break" but there is serious business at hand. In particular, exchange-traded funds or ETF investors should follow his agenda in two countries, Mexico (EWW) and Brazil (EWZ).

In a recent poll for the BBC World Service, 64% of Argentines, 57% of Brazilians, 53% of Mexicans and 51% of Chileans said they had a “mainly negative” view of American influence. But economic ties grow stronger every day. Brazil, in particular, is still one of the cheapest markets in the world with a much stronger balance sheet than even a few years ago. On a price to earnings basis, the main Brazil index trades at just over eleven times earnings. Mexico is a bit more expensive at fifteen times earnings. Keep in mind that 28% of the Mexico ETF (EWW) basket is in two companies: America Movil SA and Cemex.

Mr. Luiz Inácio Lula da Silva, Brazil's president, is expected to visit Mr Bush at Camp David in a few weeks.

iShares MSCI Brazil (EWZ)

iShares MSCI Brazil (EWZ) is trading at it high. A careful review of the point and figure chart of EWZ shows it trading well above its bullish support line at $31. Supply and demand (X’s & O’s) have battled between $33 and $40 until demand won the battle and surged to $48 by January 2007. The chart above shows EWZ currently in a column of X’s having just broken through a double top. Brazil is tracked by MyPortfolioViews unique database available to subscribers. Want more Click here.

DE Smith

Break The ETF BRIC

During the past year, investor interest in the so-called BRIC countries: Brazil, Russia India and China has skyrocketed with a commensurate rise in respective share prices.

Is it too late to jump on the bandwagon? What is the best way to invest in these countries and what allocations should be made to each country in the BRIC group?

Fund flows into BRIC countries have risen sharply during 2006 and these markets have bounced back nicely from the sharp June pullback. Interestingly, China has captured about half of all the net increases in investment from global equity managers. This BRIC mania has obscured three important basics about these markets.

The first is that these are without doubt less developed emerging markets with commensurate volatility and risk. If you got carried away in 2006, take some money off the table – now.

Second, your strategy for investing in these markets should be long term. The whole idea is that over time these faster growing markets will translate into above average returns but no doubt there will be lags and bumps along the way.

Third, it would be a mistake to view these four countries as just four cogs in a wheel. Each country has its own strengths and weaknesses and will probably not move together.

Russia for sure and Brazil to a lesser degree are essentially commodity plays. Russian share prices are highly dependent on energy prices and since all other indicators such as political freedom, manipulation of foreign investment, cronyism and market reforms are going the wrong way, I am highly skeptical of this market.

Brazil offers more hope but is also dependent on commodity prices since they account for 40% of all exports. President Lula’s re-election this year may lead to more aggressive market reforms or a pullback which would inevitably lead to the familiar boom and bust cycle.

China and India are the most promising BRIC options. Both markets have been red hot and China is riding a super cycle of investment which may very well extend through the 2008 Olympics. It is clearly in the midst of building a world-class infrastructure in urban areas but the familiar risks such as its state-dominated economy, lack of any democratic reforms, and tensions in rural areas where the majority of Chinese still struggle might derail the prized “stability” so touted by the Communist leadership. 

My view is that India over the long haul presents investors with the great bull market of the 21^st century. India however, also faces daunting challenges such as how to finance the modernization of its woeful infrastructure given its high debt levels and ambivalence towards foreign investment and privatization? Another key issue is timing. Large cap Indian companies have had a terrific run and seem quite expensive at about 20 times earnings. If earnings stay strong in 2007, the market could strengthen, but if not, expect a sharp pullback.

The best way to invest in these BRIC countries is probably through low-cost, flexible, transparent exchange-traded funds (ETFs) and their kin - closed-end funds. Claymore introduced the first BRIC ETF this fall (EEB) which tracks liquid U.S. exchange-listed ADRs and GDRs. It should however be avoided since its top ten holdings account for 57% of the ETF’s total exposure. In addition, 49% of its holdings are in Brazil, 31% in China, 14% in India and 6% for Russia.

You would be better off to make your own BRIC allocations based on your risk profile and investment objectives using country specific funds. One option is to use the China iShare (FXI), the Brazil iShare (EWZ) and the Morgan Stanley India Fund (IIF) as proxies for these markets. Barclay’s is planning an ETN that will follow an index of the largest companies on the National Stock Exchange of India but this ETF will be market cap weighted.

  

I will wait to see the company weightings but will probably still prefer (IFF) because of its nice balance with the inclusion of several well respected Indian subsidiaries of world class multinationals such as Siemens and ABB. You need to carefully watch the premium that a closed-ended fund trades relative to its net asset value.

Where would I be right now in terms of a BRIC allocation? About 30% for China, 20% for India, 15% for Brazil, zero for Russia and 35% in cash.

BRIC investors have done very well this year. Take some of your gains and get your financial advisor a nice Christmas present.

Carl Delfeld

Brazil's Strong Balance Sheet

Brazil’s booming stock market has caught foreign investor’s attention but the question  still lurks in the background like an uninvited guest – is this just another leg in the typical boom and bust cycle?

For the answer, take a look at Brazil’s improving balance sheet. While America piles on the debt, Brazil is going the other way. It decided last December to pay off its remaining $15.5 billion debt with the International Monetary Fund (that must be a relief!) and announced just last week that it will retire all of its remaining $6.6 billion worth of Brady bonds issued during the early 1990’s financial crisis

Where is the money coming from? Brazil recorded trade surpluses in 2004 and 2005 with exports for the last twelve months hitting a record $120 billion. Exports of oil, soybeans, copper, steel, autos, sugar and coffee are surging even in the face of a strengthening currency. The Brazilian real is up 52% against the US dollar since May 2004 and up 22% during 2005. Brazil is almost energy independent and foreign exchange reserves are now $58 billion even after paying off the nettlesome IMF debt.

Behind all these positive numbers are substantial reforms begun by President Cardosa and continued by Luiz Inacio “Lula” da Silva. Payroll taxes and corporate taxes have been cut, the tax system simplified and last week Brazil announced that it would eliminate the income tax for foreigners that purchase public debt. Brazil’s strong currency will likely also lead to a loosening of foreign exchange restrictions.   

A cynical friend of mine often comments that successful political leaders need to ignore their strongest supporters if they are to achieve real reform. If so, Lula is a good example since most expected him to reverse market reforms after taking power in 2002 while in fact he deepened them. Up for re-election in October, Lula has nevertheless delivered higher living standards and restored national pride. With 187 million people and an area only slightly smaller than the United States, this leading South American economic power together with Chile and Colombia are changing attitudes toward the region as a whole.

What’s the best way to bet on Brazil’s momentum and improving balance sheet. I had been recommending the Brazil iShare (EWZ) which is up 27% this year and 72% in the last 12 months. In June of last year I switched to the S&P Latin America 40 iShare (ILO) that gives you broader exposure with 50% exposure to Brazil, 38% to Mexico, 9% to Chile and 3% to Argentina. This ETF is up 18% this year and 69% over the last year.

One ADR to take a look at is wireless provider that has been on a tear America Movil (AMX) and a safer option is Colgate Palmolive which derives roughly 20% of its sales from Latin American markets.

How important is the October election to Brazil? Even with all the economic growth, lower debt, lower taxes, booming exports and strong currency, public sector debt is still 51% of GDP so continued progress is essential. Like the old saw goes, even if you are on the right track, if you’re not moving you could get run over.

By Carl Delfeld

Brazil ETF Not Just Commodity Play

In 2006, while investing in BRIC countries was the rage, China and India received most of the attention. The China ETF (FXI) was up 84% and India’s SENSEX index was up over 50%. Meanwhile almost lost in the shuffle, the Brazil ETF (EWZ) was up 45.4% - not bad, not bad at all.

With 187 million people and an area only slightly smaller than the United States, this leading South American economic power together with Chile and Colombia are changing attitudes toward the region as a whole. But the lingering question is whether Brazil’s economic recovery is sustainable or just another stage in the economic cycle. 

What is most interesting to me is that Brazil’s stock market’s performance during the past four years is not due to superior economic growth. It has had an annual average growth rate of only 2.6%, about half of world economic growth during the same period.

My view is that Brazil has been primarily a balance sheet story supported somewhat by the commodity boom. With Brazil’s President Lula being sworn in for a second term today, let’s review Brazil’s accomplishments and challenges.       

Inflation is muted and was only 3% during 2006. Brazil is almost energy independent and foreign exchange reserves are now almost $100 billion after paying off its nettlesome IMF debt. In 2006, it recorded a trade surplus of $46 billion and while interest rates are high, they are beginning to fall. 

What Chartwell ETF Advisor’s Carl Delfeld now wants to see is Brazil turn into more of a growth story. This will depend on the second term reform agenda of President Lula. He is in a strong position with a 70% plus popularity rating and a solid governing coalition. 

Here are some of the issues Brazil needs to tackle to build a sustainable platform for economic growth and a continuing bull market. The tax burden needs to come down from current 50% levels. Public spending needs to be cut but also re-directed to infrastructure projects. Corruption needs to be sharply curtailed and overregulation slashed, especially in labor markets.

Finally, Brazil needs to substantially improve its education standards if it hopes to compete head on with India and China. If Brazil even takes small incremental actions to address these issues, global investors will take note and the Brazil ETF (EWZ) will continue its upward trend.

If interest rates decline as well - it could be another impressive year for investors who don’t forget that BRIC begins with Brazil.