This article first appeared in Trend Investing on June 9, 2020; therefore all data is as of this date.
In this ‘coronavirus beaten down stocks/funds’ series of articles I have looked at both stocks and funds that have been beaten down due to the COVID-19 (coronavirus) market sell-off. Given that most global stock markets are well on the way to recovery now, this will most likely be the last article in this very successful series.
Today I look at Brazil, a market that has been heavily sold off and is now bouncing up after recently hitting a low (similar to the post GFC low in 2009), and trades on a PE ratio of 11.7 and a dividend yield of 4.49%. Brazil has been the second worst hit country by COVID-19, perhaps explaining the delayed recovery of their equity market. The Brazilian Real has also been heavily sold down.
iShares MSCI Brazil (EWZ) – Price = USD 33.27
As shown on the charts below the EWZ fund has recently bounced up, but is still only just above where it was back in 2009 at the end of the GFC. The past decade of falling oil and commodity prices has hurt Brazil. The fund is down 33% in 2020.
iShares MSCI Brazil (EWZ) 25 year price chart (in USD)
Source: Yahoo Finance
iShares MSCI Brazil ETF – 20 year performance chart (in USD)
Source: iShares MSCI Brazil ETF
A look at what drives the Brazilian economy
Brazil has a population of ~211 million and their 2020 GDP is currently forecast at -5.3%, rebounding in 2021 to 2.89%. GDP per capita in 2019 was US$17,016. The current unemployment rate is ~13%, reserve bank interest rate 2.25%, 10 year bond rate 6.93%, inflation rate 1.9%, Government debt to GDP 86%, and the currency [USD:BRL] is 4.82.
Brazil GDP and forecast GDP
The Brazilian Real is currently very weak to the USD at 4.82
Source: Trading Economics
According to Wikipedia:
Brazil is classified as an upper-middle income economy by the World Bank and a developing country, with the largest share of global wealth in Latin America. It is considered an advanced emerging economy. It has the ninth largest GDP in the world by nominal, and eight by PPP)”>PPP measures. It is one of the world’s major breadbaskets, being the largest producer of coffee for the last 150 years.
Brazil has both a services economy and an export economy. According to 2014 estimates, 5.8% of Brazil’s income came from agriculture, 23.8% from industry, and 70.4% from services.
Exports are dependent on the shipments of raw material (50% of total exports) and manufactured goods (36%).
Brazil’s main exports are: Soybeans and related soy products (17%); oil and oil products (13%); transport equipment and components (12%), and others miscellaneous (58%) (includes refined products, coffee, agriculture and materials such as iron ore).
Brazil’s main exports partners are: China (27%), the US (12%), Argentina (6%), the Netherlands (5%) and Chile (3%).
Brazil’s exports by sector
Source: Trading Economics + Own chart creation
Key summary points on the Brazilian economy
- Brazil is quite linked to global GDP. If global growth is strong then there is strong demand for Brazil’s raw materials which underpin the economy.
- Brazil’s exports are very well diversified with China as the main buyer.
IMF global GDP forecast for 2020 GDP is now -3%, rebounding to +5.8% in 2021
Source: Statista courtesy IMF
The coronavirus impact in Brazil
Worldometers reports that Brazil has 710,887 coronavirus cases and 37,312 deaths, as of June 9, 2020. The number of cases makes Brazil the second highest globally, after the USA. The chart below shows Brazil’s coronavirus daily new cases are perhaps stabilizing. We will see soon.
Brazil government response
Brazil followed the world with lockdowns and the government has had support programs (emergency salaries etc) as you can read here. Re-openings have been attempted but in some cases have been thwarted by local judges, notably in Rio de Janeiro. Many feel it is too early to reopen.
Brazil’s President wants to reopen the Brazilian economy, but COVID-19 is still not yet contained
Source: Wall Street Journal (video)
The iShares MSCI Brazil ETF details
The iShares MSCI Brazil ETF seeks to track the investment results of an index composed of Brazilian equities, with exposure to large and mid-sized companies in Brazil. The management fee is 0.59%pa.
The top holding is Vale SA [BZ:VALE3] (VALE) which is the world’s largest iron ore producer and the world’s largest nickel producer. You can read more about Vale in my recent article on the iron ore miners here.
Large banks in Brazil may have several flaws. Their apps aren’t the best, credit and fees are arguably expensive, and service channels are time-consuming and oftentimes full of paperwork. But there is one thing nobody can deny – they are rock-solid.” This solidity is based on several factors. First, the financial system is mainly in the hands of five large, profitable banks. Financial system return on equity (ROE) totalled 16.5% in September 2019, when the average of the largest private banks was 21%; and the banks are well capitalized, with core capital around 14%…….The banking system is also liquid, with more than 90% of large banks’ funding sourced locally and denominated in local funding (mostly from deposits). Reserve requirements represent R$416 billion, or roughly 6% of GDP (as of January 2020), and the central bank has also reacted to the crisis caused by Covid-19 with R$2.7 trillion of liquidity and capital measures, which combined represent 36.6% of GDP (much higher than the amount pumped into the economy in 2008, which was then R$200 billion, or 5.9% of GDP).
Top ten holdings
Breakdown by sector of the Brazil fund
As shown below the top 3 sectors are financial (29.29%), materials (16.00%), and energy (12.19%). Consumer staples (11.19%), consumer discretionary (9.76%), industrials (7.32%), and utilities (6.31%) are also significant.
Brazil’s house prices are the highest in Latin America. Brazil’s household debt to GDP is 30.4% which is much lower than many other countries.
Brazil house prices compared (USD psqm, based on capital city rates)
Source: Global Property Guide
The current PE ratio is only 11.7, with a dividend yield of 4.49% for the iShares MSCI Brazil ETF.
Valuation looks appealing assuming the country can overcome COVID-19 and rebound reasonably quickly.
Aerial views of Rio de Janeiro, Brazil
- A prolonged global economic downturn would hurt Brazil’s exports and spill over into their economy. Brazil has some sensitivity to oil and iron ore prices.
- Brazil is still struggling to contain the coronavirus. The economy may therefore remain closed for longer.
- Sovereign and political risks – Brazil has moderate sovereign risk. Brazil is the 106 least corrupt nation out of 180 countries.
- Currency risk. The stocks in the iShares Brazil fund are priced in BRL, and the fund is priced in USD. This means if the BRL was to fall further it would typically impact the fund negatively.
- The fund can trade slightly above or below its net tangible assets [NTAs].
- Market sentiment – Risks with COVID-19, US-China trade tensions, US riots.
Brazil has a young and vibrant culture with a median age of 33.5 yo
The Brazilian equity market and currency have been heavily sold down in 2020 as part of the COVID-19 sell offs. To date the Brazilian equity market has recovered about 50% of its 2020 falls but remains 33% lower YTD. This has resulted in the historical PE ratio for the fund dropping to a low 11.7, and levels just above the end of the GFC.
Brazil is still struggling to contain the coronavirus and mostly remains in lockdown. Brazil’s President Bolsonaro is keen to re-open the economy soon.
Risk remains with the coronavirus and the degree and length of global economic disruption ahead. Brazil is a significant global exporter of raw materials (notably iron ore and oil), so a global recovery will be important for Brazil to fully recover. A prolonged global recession will not help Brazil to recover.
I rate the iShares MSCI Brazil ETF as a buy for investors with a 3-5+ year time frame.
As usual all comments are welcome.
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Disclosure: I am/we are long VALE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.