Brazil is home to one of the world’s best-performing equity markets this year, a fact reflected by the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), which is higher by 67.5%. That is good enough to make the largest Brazil exchange traded fund one of this year’s top single-country funds.
Making the rally in Brazilian stocks all the more impressive is the fact that the rebound comes against the backdrop of contracting economic growth in Latin America’s largest economy. However, Brazil’s economy is expected to resume growing next year, a factor Brazilian stocks and ETFs could already be pricing in.
Related: Brazil ETFs Roar Back as Government Incompetence Ends
After several years of dismal performances, Latin America exchange traded funds are roaring back in 2016 and have actually been leaders of the emerging markets resurgence. Rebounding commodities prices and the weaker dollar are key reasons why Latin America ETFs are rebounding.
Latin America’s central bank policies are notable, at least among the region’s two largest economies, Brazil and Mexico. Although Brazil’s central bank has not hiked interest rates since last year, its benchmark borrowing cost of 14.25% is among the highest in the world, emerging or developed markets. Earlier this year, Mexico’s central bank surprisingly raised rates to help prop up the peso.
[related_stories]Brazil’s “central bank kept the Selic at a 10-year high of 14.25 percent last week, indicating that borrowing costs will only fall when policy makers are more confident that inflation will hit the 4.5 percent target in 2017. Central bank directors tweaked the language of their post-meeting statement, dropping a sentence that said there was “no room” for monetary easing,” reports Matthew Malinowski for Bloomberg.
Brazil’s central bank has not hiked interest rates since last year. Brazilian stocks have rallied this year and banks in Latin America’s largest economy appear inexpensive, those institutions are faced with declining consumer credit quality. Additionally, some Brazilian states have recently delayed payment to public workers, potentially crimping the ability of those workers to repay loans taken from Brazilian banks.
Related: How Central Banks Affect LatAm ETFs
“Brazil is showing early signs of a recovery after falling into one of its worst recessions on record. Industrial production has expanded for five straight months on the back of both rising business and consumer confidence,” according to Bloomberg.
iShares MSCI Brazil Capped ETF
