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Leading indicator points to continued low unemployment

Brazil leading employmentEnlarge Graph

The Brazilian leading employment indicator by Fundação Getúlio Vargas (FGV) is predicting unemployment to remain at the current low level over the next 2-3 months. The leading employment indicator is compiled from the employment and market expectations surveys by FGV. Historically, the indicator has proven valuable at predicting the employment levels approximately three months in advance, though its predicting ability and timing varies.

The graph above shows the indicator as of January 2013. With respect to December, the indicator increased 0.7%, driven mainly by the factors coming from the Services survey. The relevant factors were the satisfaction with the current business level and the likelihood of additional hiring in coming months, which advanced 1.8% and 1.7%, respectively.

The accuracy of the indicator varies and with such a flat reading even establishing direction may be a stretch, therefore the flat reading means little. The key insight is the reinforcement that the services sector remains strong and will likely continue growing and maintaining a base level of growth in Brazil. Investors in EWZ and DBBR should interpret this as a positive. Perhaps a better way to invest in this trend is with ETFs including EWZS and BRF, which focus on small caps, because their holdings include between 20-25% consumer discretionary stocks, which are highly levered to income growth. An even more focused play could be BRAQ, a smaller ETF focused fully on the consumer sector and with a 32% exposure in consumer discretionary stocks.