Brazilian stocks have charged higher since plumbing their pandemic March low, propelled by a strong rebound in commodity prices, record-low interest rates, and the promise of ongoing economic structural reform.
Looking ahead, analysts have expressed concern about how the country will phase out its pandemic-related fiscal stimulus, given that Brazil already had a high level of government debt before the health crisis began. "Debt is already supposed to rise from 80% to 100% of gross domestic product (GDP)," said T. Rowe's Verena Wachnitz, per Barron's. "A lot of the easy money from the rebound has passed," she added.
Wachnitz noted that possible future government reforms to help manage the cost of COVID-19 might include an overhaul of the tax system, reducing bureaucracy, or privatizing state enterprises. However, she remains skeptical about large-scale policy announcements amid the ongoing uncertainty.
From a technical standpoint, the three Brazil exchange-traded funds (ETFs) outlined below are trading near chart resistance. Let's take a closer look at each fund's specifics and explore several trading ideas.
iShares MSCI Brazil Capped ETF (EWZ)
The iShares MSCI Brazil Capped ETF (EWZ) seeks to track the performance of the MSCI Brazil 25/50 Index. To achieve this, the fund invests its large $5.1 billion asset base in stocks and American depository receipts (ADRs) that comprise the underlying benchmark. Financials and basic materials dominate sector exposure, with respective allocations of 29.37% and 16.57%. Nearly 30 million shares change hands per day on tight spreads, helping to keep trading costs low. Meanwhile, a 0.59% expense ratio makes buy-and-hold investing a viable option. Over the past three months, the ETF has rallied 30%, outpacing the MSCI Emerging Markets Index over the same period by about 9% as of July 22, 2020.
Although EWZ has continued to push higher in recent trading sessions, it finds significant overhead resistance at $33 from the June swing high and downward-sloping 200-day simple moving average (SMA). Those who short sell at these levels should anticipate a move down to $28.40, where the fund looks supported by the 50-day SMA.
iShares MSCI Brazil Small-Cap ETF (EWZS)
Formed in 2010, the iShares MSCI Brazil Small-Cap ETF (EWZS) aims to provide a similar return to the MSCI Brazil Small Cap Index – a benchmark that tracks a market cap-weighted index of Brazilian small-cap companies. Financials, utilities, consumer cyclicals, consumer non-cyclicals, and industrials all command double-digit percentage asset allocations, making the fund a good bet on smaller firms in those sectors. Roughly 100,000 shares exchange hands most days, although an average nickel spread makes it worthwhile using limit orders to minimize slippage. As of July 22, 2020, EWZS has net assets of $94.42 million, issues a 1.2% dividend yield, and is trading almost 36% higher since late April. The ETF carries a 0.59% management fee.
Like EWZ, the price of EWZS encounters crucial overhead resistance at $14.70 from the June swing high and falling 200-day SMA. Also, an elevated relative strength index (RSI) reading increases the probability of a downside reversal in this area. Swing traders who take a short position should consider buying to cover around $12, where the fund finds support from horizontal price action and the 50-day SMA.
Direxion Daily MSCI Brazil Bull 2X Shares (BRZU)
With assets under management (AUM) of $174.74 million, the Direxion Daily MSCI Brazil Bull 2X Shares (BRZU) has an objective to return twice the daily performance of the MSCI Brazil 25/50 Index. The fund tracks the same benchmark as EWZ, effectively making it the geared alternative. Traders should be aware that the ETF resets daily, meaning returns may deviate from the advertised leverage due to the effect of compounding. Meanwhile, an average 0.10% spread and ample liquidity make the fund ideal for exploiting short-term fluctuations in Brazilian equities. As of July 22, 2020, BRZU charges a 1.29% management fee, yields nearly 9%, and has gained 55.37% over the past three months.
The psychological $100 level looks like a line in the sand for the bulls. If they fail to push the price above this closely watched level in the coming days, expect a decline to reactionary support between $67 and $71. Before executing a short sale, traders may decide to wait for a reversal candlestick formation – such as a bearish engulfing pattern – to confirm a short-term top.