FLBR ETF

Recommend holding Franklin FTSE Brazil ETF due to inflation exceeding targets and increasing complexity in Brazilian investments. The government's spending cut package fell short, raising skepticism about Brazil's public debt trajectory. The Brazilian stock market has reached extremely cheap levels, but with justification.

I am downgrading my recommendation to hold the Franklin FTSE Brazil ETF due to deteriorating factors like the dollar and electricity prices in Brazil. Despite Brazilian assets being historically cheap, a new cycle of high interest rates will delay multiple expansions, making the risk/return unattractive. Potential risks include the Fed possibly cutting US interest rates, which could give Brazil's Central Bank room to maintain or cut rates later.

FLBR: Exaggerated Pessimism Opens Up An Opportunity

FLBR has delivered negative returns of 17% and underperformed emerging markets and global stocks in 2024. Despite the adverse performance so far, we are now prepared to turn more optimistic on FLBR as some key macro-economic variables are in a better place. Despite an unappealing payout in June, FLBR's yield of over 7.3% still looks very compelling.

FLBR presents good value with a high dividend yield of 9.33% in 2023, trading at 1.5x book value and 8x earnings. However, worries about President Lula's interventionist policies towards critical sectors like energy and materials are a concern. While Brazil's export-focused economy may help offset domestic macroeconomic risks, the unpredictability of commodities and potential economic cycles, as well as political uncertainties, diminish the appeal of FLBR.

The Franklin FTSE Brazil ETF offers low-cost access to mid-and-large-cap Brazilian stocks. We touch upon a few differing characteristics of FLBR in relation to its largest peer- EWZ. Brazilian macros may not be as resilient as they've been through FY23, and compared to the other BRICS, the drop-off in GDP in 2024 will be the most pronounced.

Franklin FTSE Brazil closely mirrors the performance of the FTSE Brazil Capped Index, making it an attractive option for investors seeking RIC concentration requirements. FLBR is concentrated in the finance, energy minerals, and non-energy minerals sectors, with notable holdings in major Brazilian banks and companies like Vale and Petrobras. Macroeconomic indicators, fiscal concerns, tax revenue trends, and commodity prices shape FLBR's future outlook, prompting cautious optimism amid risks.

The Franklin FTSE Brazil ETF invests across the most important Brazilian companies. We highlight key advantages of FLBR compared to the larger iShares MSCI Brazil ETF including a lower expense ratio and historical outperformance. Improving macro data out of Brazil supports a positive outlook for Brazil stocks.

Brazil's key economic indicators are now moving in the right direction. A sooner-than-expected policy pivot may be on the horizon. The heavily discounted Franklin FTSE Brazil ETF is poised to benefit.