Up nearly 63% year-to-date, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is already one of 2016’s best-performing non-leveraged exchange traded funds. That might make it hard to fathom more gains for the largest Brazil ETF, but some market observers believe Brazilian equities offer more upside.
Now that it is confirmed that former President Dilma Rousseff has no chance of returning to power, Brazil, Latin America’s largest economy, can move forward and put some of the issues that plagued Brazilian equities during the Rousseff Administration behind it.
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.[related_stories]
“Brazil’s Selic/policy rate is currently at 14.25% and consensus retail inflation expectation for next year is at 5.5%…the room for cutting nominal interest rates is immense…We are positioning for stocks that should perform strongly if interest rates decline: financials, shopping malls and concessions (infrastructure and utilities), despite risks on timing and magnitude…J.P. Morgan forecasts the Selic rate at 11.75% in 2017 vs. 11.25% consensus forecast (Central Bank Focus Survey),” according to a JPMorgan note posted by Dimitra DeFotis of Barron’s.