Brazilian ETF Rips Higher on Hopes of Major Pension Fix

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Brazil’s soccer team isn’t the only winner in the country this month. Its pro-business President is also nearing his first big victory, and the stock market’s loving it.

The iShares MSCI Brazil ETF (EWZ) has risen 7 percent so far this month. That makes it the top major fund in July, with almost quadruple the gain of the S&P 500 over the same period.

The move comes as President Jair Bolsonaro’s landmark pension-reform bill nears a potential vote in the congress. It was his most important policy idea after winning a surprise victory against establishment politicians last October.

The measure, similar to converting U.S. social security into 401(K)s, would shift hundreds of billions of dollars in savings into private accounts. If passed, it would be a big deal for a few reasons.

iShares MSCI Brazil ETF (EWZ), weekly chart, showing long-term highs.
iShares MSCI Brazil ETF (EWZ), weekly chart, showing long-term highs.

First, some of that money would inevitably go into Brazilian stocks. Second, supporters of the privatized pension system argue it will narrow the country’s gaping budget deficit. Opponents may reject that claim, but for now the market views any kind of fiscal relief as a positive.

Brazil Open For Business?

Third, a victory with pensions could provide Bolsonaro with political momentum to pass other pro-business measures such as privatization. That could help put Latin America’s biggest economy back on the map for investors who shunned it during years of socialist rule.

And, while plenty more work needs to be done, most Latin American experts know that a similar pension overhaul transformed Chile for the better decades ago.

Some other stars are lining up for the country. First are actions by leaders in Washington with the potential to weaken the U.S. dollar. Yesterday Federal Reserve Chairman Jerome Powell warned of “crosscurrents” and a “slowdown in business fixed investment.” That pretty much confirmed expectations for an interest-rate cut on July 31.

Second, in a less definite story, Bloomberg reported that the Trump Administration wants to intervene in currency markets to drag down the greenback. Both of those factors are potentially bullish for foreign assets like EWZ.

Another positive could be the impact of Trump’s trade war with China. Will investors seeking exposure to global stocks simply shift some of their capital from China, which is facing headwinds, to Brazil, which is enjoying tailwinds?

Holdings in the iShares Fund

Here’s a breakdown of the five biggest holdings in the iShares MSCI Brazil ETF:

  1. Itau Unibanco (ITUB): The country’s largest bank.
  2. Vale (VALE): The world’s largest iron-ore producer.
  3. Banco Bradesco (BBD): Brazil’s No. 2 lender, after ITUB.
  4. Petrobras (PBR): A former government-owned oil company that’s still partially under political control.
  5. Brasil Bolsa: The Sao Paulo-based operator of Brazil’s main stock exchange.

Several other companies from Brazil trade in the U.S. Some of the big ones include:

  • PagSeguro (PAGS): A high-flying Latin American provider of electronic payments, somewhat like Square (SQ).
  • StoneCo (STNE): Another digital payments company.
  • Saneamento Basico (SBS): A trash hauler.
  • BRF (BRFS): A chicken-and-pork producer like Tyson Foods (TSN).
  • Gerdau (GGB): A steelmaker.

In conclusion, Brazil has enjoyed flashes of bullishness since October as investors looked for new leadership to fix the economy. Now that may be happening as rival China loses some of its appeal.

This post is part of our regular “ETF of the week” series. It focuses on exchange-traded funds with interesting news or price changes.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.