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.
Related: Brazil ETFs Roar Back as Government Incompetence Ends
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.
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’s economy is expected to grow less than 1% this year, but that is better than the contraction experienced last year.
“Our year-end 2016 target for the Ibovespa is BRL57,000 (base case)-63,000(bull case), but as discussed earlier in this report we encourage investors to focus on medium-term earnings power and focus on P/BV metrics,” according to the JPMorgan note posted by Barron’s.
For more news on the Emerging Markets ETFs, visit our Emerging Market category.
iShares MSCI Brazil Capped ETF
