By Steven Orlowski
While the Brazilian economy sure is facing some near-term headwinds, the long-term outlook is good. Given the pounding some Brazilian investments have taken, you might think the country is a disaster. It may be time to revisit one such ETF: Market Vectors Brazil Small-Cap ETF (NYSEARCA:BRF).
But let's consider for a moment that in 2011 Brazil overtook the U.K. as the world's sixth-largest economy. Growth did slow dramatically from 7.5% in 2010 to 2.7% in 2011 and expectations for future growth vary. Brazil has been taking some measures recently to stimulate its economy; lowering interest rates for one. We'll have to wait and see how much growth it really experiences.
For now at least that growth is still faster than the US or Europe. In addition to overtaking the U.K., Brazil has a per-capita GDP greater than both India and China. It has also been reported that foreign direct investment inflows increased by 87% to $48 billion in 2010, putting the nation fifth in world capital inflows.
Plenty of challenges remain for Brazil however. In terms of ease of doing business the country is ranked 126th in the world by the World Bank. In terms of taxes it's ranked 150th. Bureaucracy remains a problem as registering a new company can reportedly take as long as two years.
Despite the economic slowdown and other challenges some Brazilian investments have no doubt been beaten down enough and are bottoming. One ETF in which I have successfully invested in the past is the Market Vectors Brazil Small-Cap ETF (BRF). BRF seeks:
"to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Brazil Small-Cap Index (MVBRFTR), a rules-based, modified market cap-weighted, float-adjusted index intended to give investors exposure to Brazilian small-cap companies."
I like BRF and was an early investor in it when it first traded back in May of 2009. It did very well for its first 18 months or so, rising from $25.00 to nearly $64.00 per share in November of 2010, a 256% gain. I don't own it now, nor have I for some time, but it is looking appealing once again. Since that November high it has dropped to a current price of about $35.00.
BRF is well diversified as illustrated by the sector breakdown seen below. Paired up with its larger-cap cousin the iShares MSCI Brazil Index ETF (NYSEARCA:EWZ), you could build a tidy Brazilian portfolio.
- Consumer Discretionary 31.1%
- Industrials 21.2%
- Financials 12.5%
- Materials 6.8%
- Utilities 6.4%
- Health Care 5.6%
- Information Technology 5.3%
- Telecommunication Services 4.0%
- Energy 3.8%
- Consumer Staples 3.3%
The charts supports my thesis as well, at least for now. BRF appears to have established both a short- and long-term support level at $35.00 as demonstrated in the following three and one-year charts.
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Considering that it has a dividend yield of 3.16%, BRF definitely deserves a second look. Naturally, a continued slowdown or contraction of the Brazilian economy could bring the price down further. So if you dip your toe back in BRF's water be careful, keep an eye on it and preferably use defensive stop orders to limit your risk.