Posts Tagged ‘EWZ’

Overview of Brazilian Investment Banks – Market Realist

Wednesday, February 27th, 2013

According to Market Realist’s Emerging Market’s Analyst:

In a previous article we reviewed the main Brazilian Retail banks to give investors in EWZ some background on MSCI Brazil Index’s 25% exposure to the Brazilian financial sector.  This article will focus on the domestic investment banks.

Santander and HSBC occupy the #6 and #7 spots in the Top 10 Brazilian Banks by assets, with shares of 8% and 3% respectively.  Other major foreign banks such as Citi, J.P. Morgan, Credit Suisse and Deustche Bank are small market players in the retail banking arena, each with shares between 0.5% and 1% of the total banking assets.

While most of these banks are not leaders in the Brazilian retail banking landscape, all these foreign banks are part of the top 10 banks by investment banks by fees for Latin America (consisting mainly of Brazil and Mexico).  This classification includes fees for M&A (merger and acquisitions advisory), loans (credit lending), DCM (debt capital markets, i.e., bonds) and ECM (Equity Capital Markets, i.e. stock issuance).

The local Brazilian investment banks

The only local banks within the top 10 investment banks are BTG Pactual (leading the table), Itau BBA, and Santander BBI.  The table below shows the league table rankings as of Aug 2012:

BTG Pactual has an interesting story and has been referred to by some as the Goldman Sachs of Latin American or its “tropical version”.  The bank was sold by Brazilian investment banker Andre Esteves to UBS in 2006 for US$3.1bn when he was just 37 years old.  Three years later he bought it back for USD2.5bn when UBS hit a rough patch during the financial crisis.  Pactual currently has a joint venture with Caixa Economica Federal that jointly owns Banco PanAmericano.  This is BTG Pactual’s first acquisition of a retail bank.

Itau BBA, the investment bank arm of Itau Unibanco Holding, was created in 2002 when Itau acquired Banco BBA-Creditanstalt in 2002.  In 2011 it achieved third place in the Top 10 Brazilian Investment Banks table; as of August it was placing fourth for 2012.  Earlier this year it received the Best Investment Bank for Brazil 2012 Award by Euromoney.

Bradesco BBI was #7 in the Top 10 table for 2011 and so far this year its holding the #8 spot, followed closely by foreign banks Santander and HSBC.  Earlier this year it also received the Best Investment Bank – Brazil 2012 Award, this one was awarded by Global Finance.

For more information, please visit Market Realist’s emerging market section: Emerging Markets

Reducing your exposure to financials in Brazilian ETFs – Market Realist

Wednesday, February 27th, 2013

According to Market Realist’s emerging markets analyst:

Several Latin America oriented ETFs such as MSCI Brazil Index Fund (EWZ) or Global X InterBolsa FTSE Colombia 20 ETF (GXG) have a larger proportion of their holdings concentrated in the financial sector. These holdings are usually concentrated in nature, with a few large cap securities accounting for most of the sector exposure. While the increased concentration may be seen as a negative by most investors, the keen investor may be able modify his or her exposure to the sector accordingly.

An example of an ETF with too much financial exposure is GXG. A quick glance at its fact sheet will reveal that the ETF’s financial sector exposure is almost 25%. First of all, investors need to avoid being mislead by the category titles. For example, GXG’s exposure to the Financials sector seems to be only 17%, but there is an additional 7.5% within a  category called Financial Services. Reviewing the Top 10 Holdings in the fact sheet will show that Bancolombia, Grupo Aval and Banco Davivienda are the main financial stocks in the portfolio, and that they account for c. 22% of holdings. Investors not familiar with the emerging market companies highlighted in fact sheets can perform a quick Google Finance search to define the industry classifications for unknown tickers.

Below we illustrate how to neutralize the exposure to the financial sector by selectively shorting the ETF holdings. The process is as follows:

  1. Find the ETF portfolio holdings for which exposure is to be eliminated.
  2. Calculate the weight of those companies within the ETF and get the equivalent dollar value for the investment in the ETF.
  3. Divide the dollar share of each company by its price to get the number of shares to short.

For example, Bancolombia is currently trading at COP27,600, equivalent to $15.19.  Bancolombia has a weight of 12.1% in GXG, so assuming a $1,000 investment in GXG, the dollar share of Bancolombia would be $121.In order to eliminate the exposure to Bancolombia, one would have to  sell short the equivalent amount of shares, which is obtained by dividing the dollar exposure by the share price: $121.00 / $15.19 = 8 shares. The 8 shares sold short would cancel out the $121 of exposure to Bancolombia. The same could be done for the other three banks, as shown below. Note that the number of shares may not be a whole number, in which case one can round to the closest whole number, keeping in mind the hedge will not be perfect.

To see the entire article and table, please see the following Market Realist link: Reducing Financial Exposure in Brazilian ETFs