Staying Away from iShares MSCI Brazil ETF

I wrote a piece here last May about why I disliked the iShares MSCI Brazil ETF (EWZ). Much of what I said was predictable given the nature of how Latin American economies are structured.

Fundamentally speaking, EWZ is a commodities play rather than a true economy-wide index fund. Latin America and Brazil remain way too dependent on commodity exports and that fuels the volatility we're seeing now.

I also said a big issue for EWZ was not hedging its investments back to the U.S. dollar, opting instead to use the Brazilian real. Historically, nations like Brazil do very poorly when the world goes into recession because they lack fiscal discipline.

Now Brazil and its central bank are struggling to prevent a currency meltdown. These, of course, were issues experienced investors knew about way before the fund started its downward spiral during the summer. 

So what about getting into the action now that EWZ is trading lower? I would stay away for now. This is purely a speculative play at this point. A further decline in commodity prices and global demand will significantly reduce exports next year and will contribute to lower growth.

The forecast for 2009 growth in Brazil is 2.8%, but this is a very optimistic number in my view. The fortunes of the Brazilian economy remain heavily tied to commodity cycles and we're watching the volatility that comes with that.

Disclosure: none

Comments

[irmomale:]

I'll avoid EWZ for now. Thanks for this information.

2008 Oct 23 11:22 AM

[ken wender:]

My question for Mr. Zeledon, at what point does EWZ or RSX have value ? EWZ is down 70% and RSX is down almost 80%. At some point there must be a buy here

2008 Oct 25 10:13 AM

[Max Zeledon:]

@ khwender:

Look, our expectations and assumptions about the world seldom match reality. This is a huge crisis. We don't know what's going to happen over the next couple of years. The fall in exports to the U.S. and Europe will have devastating consequences for Brazil and other BRIC nations. To what extent? I don't know. Also, hedge funds are dropping like flies and I just don't think people understand the power these institutions had over the market. Many hedge funds were playing the “carry trade” in Brazil. They were borrowing Yen at a very low rate and they were investing the proceeds in Brazil. When things got rough for the real they had to dump. just don't see how EWZ will gain any momentum right now.

2008 Oct 27 10:11 PM