Brazil ETF Reflects Both Strengths and Weaknesses Of Nation's Economy

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.