It Turns Out Brazil Has Political Problems
By Roger Nusbaum, AdvisorShares ETF Strategist
Paraphrasing Lloyd Bridges from the movie Airplane, Brazil picked the wrong week to quit sniffing glue as news of an alleged incident implicating President Michel Temer with bribery sent the benchmark Bovespa index and the real reeling on Thursday. When the dust settled on Thursday the Bovespa was down about 9% (there was some snapback on Friday) and the dollar gained 7% against the real (this pair is quoted as USDBRL so is tracked as the dollar’s move, up or down, against the real).
The larger Brazil ETFs were down mid teen percentages on Thursday, the 3X long ETF was down almost 50%, even some of the broad based emerging market ETFs were hit some, giving up about 2%. The performance of the large ADRs was mixed relative to the 15% decline for the broad-based Brazil ETFs.
The Bovespa had a great 2016 rising almost 40% and the dollar fell 20% against the real and these trends continued into 2017, there was plenty of momentum behind these trends, 15 months is not insignificant.
If you’re keeping score at home that makes some sort of scandal for the last three sitting presidents. At one point, one of those three, Lula, was considering another presidential run simply to delay prosecution (this is how Brazilian law works).
Other emerging market investment destinations have their own issues like India where corruption (theft) appears to exist at lower levels of government or Thailand which has a coup every few years, the latest being in 2014. Thailand had two coups in 1976!
Despite the scary headlines like the one on Thursday from Brazil, these markets rip higher at times, often for years, and then the trend turns quickly. In 2003 Thailand more than doubled. From 2009 to 2013 it quadrupled. From 2003 to its 2008, Brazil was a seven-bagger. The downsides can be just as swift. Brazil cut more than in half during the financial crisis as did Thailand and you can look for yourself to see how much it fell at the time of the Asian Contagion, I almost didn’t know a broad index could fall that much (other than Japan having done something similar a few years earlier).
If you take the time to look at the charts of various country indexes or the single-country ETFs that track them you will see the extent to which these trends last for years and the hiccups that come along the way, before the trends end. Then they struggle for a while and after that the pendulum swings back in their favor again.
Long term ownership should help returns and reduce volatility, emerging markets dramatically outperformed domestic during the previous decade while the US was on a bumpy ride to nowhere. An investor or their advisor needs to understand these dynamics and needs to be able either endure them, manage them or outsource the management of them.