By Joseph Hogue, CFA
Automakers and the general industrial sector in Brazil may be in for hard times come 2013. The most recent industrial report showed a contraction of 1% over the previous month, after a strong 3.2% expansion in August. The slowdown, possibly a prelude to coming months, came from a surge in auto sales earlier in the year, leaving demand weak last month. In an effort to jumpstart the economy, the government introduced tax breaks on new car purchases, which were due to expire in October. The tax breaks have been extended to the end of the year but many consumers have already pushed forward their purchases, and demand will probably slow over the next few quarters. Auto manufacturing makes up roughly one-fifth of the industrial sector in the country, so any reduction in sales has a strong impact through the rest of the economy.
The MSCI Brazil (NYSEARCA:EWZ) is the largest ETF focused on publicly traded securities in the market, with $9.2 billion in assets. The fund holds a diversified mix of financials (25.4%), materials (19.4%), energy (18.7%), consumer goods (18.1%), and smaller allocations to utilities, industrials, IT, and telecom. The fund has returned 6.3% over the last year with a 2.74% dividend yield, and trades for 17.9 times trailing earnings of holdings.
The Global X Brazil Consumer ETF (NYSEARCA:BRAQ) is a more focused investment on the consumer sector, holding shares in 32 companies with an average market capitalization of $799 million. Industries include food and beverage (48.0%), personal and household goods (20.3%), retail (18.2%), and travel and leisure (12.9%). The fund has returned 14.9% over the last year with a 1.15% dividend yield, and trades for 25.1 times trailing earnings of holdings.
Investors may be able to make an indirect bet on the auto industry through shares of Gerdau (NYSE:GGB), a manufacturer of steel products in the country. The shares will benefit from any strength in the auto industry, but also follow the outlook for construction in the region. Shares trade cheaply at 17.5 times trailing earnings, against an industry average of 23.2 times, and pay a 2.1% dividend yield. The company beat expectations for the third quarter with earnings of $0.23 per share on $9.8 billion in revenue.
With the industrial sector facing some tough headwinds going into 2013, investors may want to shift allocations to the consumer sector, which continues to see overall growth.