An unexpected interest rate cut in Brazil may provide momentum for exchange traded funds that invest in the Latin American country, such as iShares MSCI Brazil (EWZ).
Emerging market governments have been cautious as global growth engines have been sputtering and major developed nations are in a slowdown. Brazil was locked into a tightening cycle for most of 2011 to keep its economy from overheating, but now that commodity prices are weakening, policymakers have slashed interest rates, reports Samantha Pearson for Financial Times:
“Reviewing the international scenario, the monetary policy committee considers that there has been substantial deterioration, back up, for example, by large and widespread reductions to the growth forecasts of the main economic regions,” the central bank said.
On Wednesday, policymakers cut Brazil’s benchmark Selic rate by 50 basis points to 12% after recent hikes of 175 basis points this year. Major banks such as Goldman Sachs have cut their 2011 growth estimates for Brazil to 3.7%, from 4.5%, due to the slowdown in economic activity in Europe and the U.S. Economists were expecting the rate to be held steady at 12.5%.
The Selic remains one of the highest rates in the world and at 12%. This has created an inflow of speculative cash from overseas and has overvalued the real, Brazil’s currency, in the process. The real is up more than 40% to the U.S. dollar, since late 2008.
EWZ, the ETF tied to the Brazilian market, is down more than 10% year to date. The Wisdomtree Dreyfus Brazilian Real Fund (BZF) is up 7.7% so far this year, according to Morningstar.
Other ETFs that invest in Brazilian stocks include Market Vectors Brazil Small-Cap (BRF), Global X Brazil Mid-Cap (BRAZ), iShares MSCI Brazil Small Cap (EWZS) and First Trust Brazil AlpaDEX (FBZ).
iShares MSCI Brazil
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Tisha Guerrero contributed to this article.
