"Brazil has long been our favorite of the BRIC countries," says Carl Delfeld. In his Chartwell Global Wealth Letter, the advisor looks at two favored Brazilian equity ETFs.
"Brazil seems to have confounded its critics, who view it as a boom and bust economy; the country has been upgraded to investment grade status by Moody’s.
"The US ratings agency cited the resilience of the Brazilian economy to the financial crisis for the upgrade of its sovereign debt ratings one notch to Baa3, its lowest investment grade rating.
"This elevation of quality is well earned after years of reform in the country that led to lower inflation and a stronger currency as well as lower levels of government debt.
"Brazil's economy has also demonstrated its resiliency by rebounding nicely after a short-lived recession. Moody’s said the strong banking system, high-level of foreign currency reserves and quick recovery from recession shows Brazil is now ready to join the investment grade club.
"This will have important implications for Brazilian equities and bonds since many funds are only allowed to invest in investment grade assets as those in high-yield or junk, the category below, are considered too risky.
"I have long preferred the small cap Market Vectors Brazil Small Cap ETF (NYSE: BRF) over its large-cap brother iShares MSCI Brazil Fund (NYSE: EWZ) primarily because it offers 40% exposure to Brazil’s dynamic consumer sector while EWZ tilts to materials and financials.
"EWZ invests in mega-cap stocks and is tilted towards the materials, financials and energy sectors, while BRF (not surprisingly) focuses on small cap equities and has much greater allocations to the consumer products and services.
"Although Brazil’s economy has become increasingly diversified in recent years, the largest companies in the country are still largely materials and energy companies. These two sectors account for more than half of the assets of EWZ, but less than 15% of BRF.
"Brazil is still not expensive relative to other emerging markets and this upgrade to investment grade status should propel it further forward. Use an 8% trailing stop loss and consider adding BRF and EWZ equally in your portfolio."
