BRICS' Other Problem: Sliding Currencies
Each member of the BRICS quintet has its own batch of specific economic problems.
In China, inflation remains pesky, while investors are concerned about the ability of policymakers to engineer an economic soft landing. At the same time, Russian equities have been ravaged by the rapid decline in oil prices.
Brazil is contending with declining oil prices, inflation and China's economic malaise. China is Brazil's largest trading partner. South Africa has an unemployment rate that is uncomfortably high, while India's economic problems are almost too numerous to name.
Yet, all of the BRICS share one thing in common: Plunging currencies. In fact, the decline in BRIC currencies is the worst since at least 1998, according to Bloomberg. Stephen Jen, a managing partner at hedge fund SLJ Macro Partners LLP, said the currencies of Brazil, India and Russia and could tumble another 15 percent by the end of this year.
That is not an inviting forecast.
Here are the ETFs that could suffer the most. Investors should note an ETF tracking the Russian ruble was shuttered earlier this year:
WisdomTree Dreyfus Brazilian Real Fund (NYSE: BZF) BZF tracks "both money market rates in Brazil available to foreign investors and changes in value of the Brazilian Real relative to the U.S. dollar," according to the WisdomTree's Web site. Well, the U.S. dollar has been taking the real to the woodshed. In the past 90 days, BZF has slid 11.2 percent while the PowerShares DB Dollar Bullish (NYSE: UUP) has climbed almost four percent.
The real touched a month-low against the dollar Wednesday as global investors remain concerned that the Brazilian government has no tricks up its sleeve to boost economic growth and stem the currency's slide. BZF's vulnerability would surge if the fund falls below $18.
WisdomTree Dreyfus South African Rand Fund (NYSE: SZR) There is a good news/bad news when it comes to investing in South Africa. The country is by far Africa's largest economy and is home to bountiful precious metals resources. Cautionary tales exist in the form of a political situation that is viewed as volatile and an unemployment rate north of 20 percent.
The WisdomTree Dreyfus South African rand is thinly traded at less than 1,400 shares per day on average, but that has not stopped the fund from falling 7.7 percent in the past three months.
WisdomTree Dreyfus Indian Rupee Fund (NYSE: ICN) With the specter of a possible move to junk status hanging over India it is not surprising that there is speculation that Asia's third-largest economy could be booted from the BRICS quintet.
Amid rising deficits, slowing GDP growth and rising concerns by global investors that the Indian government has been largely ineffective in dealing with the country's faltering economic fundamentals, it is not surprising the rupee has been battered. The WisdomTree Dreyfus Indian Rupee Fund has lost 8.1 percent in the past three months.
WisdomTree Dreyfus Chinese Yuan Fund (NYSE: CYB) The WisdomTree Dreyfus Chinese Yuan Fund deserves this much credit: It has not been nearly as bad as the other ETFs highlighted here. There is some anecdotal evidence to support the theory that the yuan may be in for some near-term declines. The Wall Street Journal reported that Chinese exporters are starting to hold dollars longer because they fear the yuan's ascent will be limited.
WisdomTree Dreyfus Emerging Currency Fund (NYSE: CEW) CEW's lineup is comprised of the Mexican peso, Brazilian real, Chilean peso, South African rand, Polish zloty, Russian ruble, Turkish New Lira, Chinese yuan, South Korean won, Indonesian rupiah, Indian rupee, and Malaysian ringgit with the BRICS currencies accounting for about 40% of the fund's overall weight.
Given CEW's broad exposure beyond the BRICS, it is arguably a safer play than say BZF or ICN. CEW would also make for the better emerging markets currency ETF rebound candidate in a market environment that would support such a move. The problem is that environment does not exist today.
For more on emerging markets ETFs, click here.
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