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Brazilian Resurgence

Editor's note: This piece originally ran earlier today on our newest Premium service, ETF Profits. Click here for a 14-day trial to this exciting product!

Brazil ETFs experienced lift-off last week. A rally in emerging-market shares benefited many ETFs, but iShares MSCI Brazil (EWZ) gained more than 5%. The rally was particularly kind to Market Vectors Brazil Small-Cap (BRF), which popped almost 9%.

This sudden jump in the shares suggests that investors have come back to this once-favorite emerging market. Although shares have performed well over the past couple of years, 2010 was a year for leadership by the smaller Southeast Asian markets of Indonesia, Thailand, Malaysia and Taiwan. Among the BRIC nations, Russia and India were the stronger performers, while China and Brazil lagged.

Brazil's underperformance left shares relatively cheap compared with the emerging-market index. Midway through 2010, Brazilian shares traded at a premium to the broader index, but now trade at a discount of several percentage points -- and as much as 10% at one point. Not spectacularly cheap, but enough that some institutional investors are increasing their allocations to the country.

One source of strength for Brazil is its commitment to economic growth. The country's current president, Dilma Rousseff, was a Marxist guerrilla in the 1960s and now leads the Worker's Party. Her current slate of economic policies include payroll, investment and small-business tax cuts. The government is also cutting spending to fight inflation, which has pushed interest rates to almost 12%. The cost of living is rising quickly, too, and Rousseff angered unions by raising the minimum wage less than the demanded amount.

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