In the run-up to the football World Cup, ETF investors have been busily trimming their exposure in Brazil, reports Team IFM
Sao Paolo, June 6: Ahead of 2014 FIFA World Cup, investors in equities are looking at Brazil as a long shot. They have been steadily reducing their exposures in Brazilian equities despite the recent rebound in the country’s main index and improving corporate mood, an independent economy tracker said Tuesday.
As per Markit’s findings, there are three broad trends. First, investors in exchange-traded funds (ETF) have withdrawn from funds with Brazil exposure for nine of the last 12 months. Second, US-listed MSCI Brazil Capped ETF saw the largest outflows with almost $305 million withdrawn. And finally, basic materials firms have seen the most bearish analyst sentiment in the last three months.
“In the wake of last week’s disappointing growth figures, this appears to be a well-founded strategy,” said market tracker Markit.
Last Friday, official government statistics agency IBGE said Brazil’s economy expanded 0.2 percent in the first quarter this year, compared to the October-December 2013 period from the previous quarter.
The latest data reflected an economy with slowing rate of growth as the manufacturing sector led by automobile manufacturers cut back production after demand cooled as a result of higher interest rates and rising inflation. Brazil’s growth had swelled 0.7 percent in the fourth quarter last year.
Reuter said the latest data was in line with the median forecast of 39 analysts it polled. However, IBGE data showed actual year-on-year growth was lower than that forecast by economists Reuters polled; the economy grew 1.9 percent in the first quarter compared to a year-ago period, as against the 2.1 percent growth predicted in the Reuters poll.
According to the agency, Bruno Rovai, an economist at Barclays, and other analysts it spoke to said falling confidence among investors and consumers, coupled with rising inventories, likely spelled continued weak activity through 2014 and probably beyond.
“I couldn’t find anything positive at all in the (data),” Reuters quoted Rovai as saying.
A separate Reuters poll earlier suggested Brazil’s industrial production may have registered a fall for the second straight month in April with inventories piling up, another sign of weakening economic growth after a disappointing first quarter numbers.
According to the median of forecasts of 23 analysts in the Reuters poll, industrial production – comprising output from factories and mines – dropped a seasonally adjusted 0.3 percent from March.
“The worst thing is that (weak) confidence data from last month and the World Cup kicking off in June also do not suggest any stronger recovery in the second quarter,” Reuters quoted a research note by economists with Rosenberg & Associados.
Brazil’s growth hasn’t gone beyond the 3-percent mark since 2010, when it spiralled 7.5 percent. Dow Jones said analysts surveyed by the central bank are not optimistic about the economic output expanding beyond 1.6 percent this year and 1.9 percent in 2015.
This pessimism is reflected in the equities market as well, and the country continues to see investors reduce their ETF exposure. Markit analyst Simon Colvin said the pessimism primarily stems from the county’s heavy dependence on volatile commodities, such as slumping iron ore, which looks set to slow economic growth in South America’s largest economy.
While the national team has seen its FIFA World Ranking score recover from an uncharacteristic dip over the last couple of years, ETF investors have been busily trimming their exposure, he noted. “If investor sentiment in Brazil is anything to go by in the lead up to the imminent World Cup,” said Colvin, “the country’s pre-tournament favourite spot on field is not reflected in appetite for Brazilian equities.”
The current level of assets under management (AUM) is now just above the $10-billion mark, a number that has fallen by over $400 million since the start of the year.
“This fall in AUM in the 46 Brazil exposed ETFs marks the lowest aggregate AUM figure since the start of 2008 when the total number of funds tracking the country was a third of the current offering,” the Markit survey report said.
Moreover, it added, although last year’s fall in AUM was partly attributed to falling equity and currency values, the recent dip in AUM is entirely driven by outflows as both the country’s currency and main equity index have performed strongly since the start of the year.
As for the flows in the months immediately preceding the tournament, it said, investors have trimmed their exposure to Brazilian ETFs for the last seven months running with over $1.4 billion of outflows. Year to date, the largest outflow of any Brazil ETF was in the Wisdom Tree Brazilian Real Fund, which saw a one-day outflow of $454 million in January this year.
On the equities side, the US listed MSCI Brazil Capped ETF saw the largest outflows with just shy of $305 million withdrawn since the start of January.
The country’s heavy reliance on mining and natural resources is one of the weak points in the developing economy, Markit said.
The 11 Brazilian basic materials firms in Markit’s research have seen the “worst” analyst revisions in the last three months out of any of their country peers, according to the economy tracker.
Iron ore’s sinking value has seen three of the five Brazilian steel firms sink to the lowest analyst revision quintile group. Leading the bearish analyst sentiment is Gerdau, which has seen analysts trim their forecasted profits by a fifth in the last three months.
Consequently, Markit said, basic materials firms also lagged in dividend payments. The gloomy mood in basic materials was also reflected in the forecasted dividend payments made by the country’s mining firms, “which are expected to lag behind the rest of their country peers”.
The basic materials constituents of the MSCI Brazil index are expected to see the value of their local payments jump by 3 percent from the previous fiscal year, while the index as a whole is forecasted to grow payments by over three times that.
Industry giant Vale, which has also seen a trim in analyst forecasts in the last three months, is expected to drive the sector’s weak dividend growth. “Our dividend team is expecting the company to hold its dividend flat in the coming fiscal year,” Markit said.
These weak results have seen short sellers circle the country’s largest single dividend payer as nearly 60 percent of the ADRs available to sell short are already out on loan, Colvin said.