The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Latin America’s largest economy, is up more than 65% year-to-date as Brazil is home to one of the world’s best-performing equity markets. That does not mean Brazilian equities can’t keep delivering upside.
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.
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Some market observers believe Brazil can continue improving, but issues linger.
“We now expect GDP to contract by 3.5% this year, followed by modest growth of around 0.5% next year. We expect the recovery will be primarily led by private investment, a function of rising business confidence and the need to increase production to replenish depleted inventories,” according to a Moody’s Investors Service note posted by Dimitra DeFotis of Barron’s.
Some investors are reevaluating Brazilian stocks, something that has benchmark indexes there trading at the highest multiples in a decade. However, Brazilian assets became more appealing this year thanks to the weaker dollar, stronger commodities prices.
Another potential catalyst for Brazilian stocks, though further down the road, is the possibility of lower interest rates. At 14.25%, Brazil has some of the highest borrowing costs in the world.