The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Latin America’s largest economy, is up nearly 5% over the past week and one of the primary catalysts behind that rally is a recent interest rate cut by Brazil’s central bank.
On Wednesday, Brazil’s central bank lowered the benchmark Selic rate by 25 basis points to 14%. That is still one of the world’s highest benchmark interest rates, but the rate cut could be a sign that the central bank there is growing confident that inflation is ebbing and that the local economy is improving.
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.
[related_stories]Rebounding commodities prices and the weaker dollar are key reasons why Latin America ETFs are rebounding. Brazil hosted the Summer Olympics earlier this year, which could be a catalyst though the jury is still out on that.
“The almost doubling of the SELIC over the last 4 years came against a backdrop of deteriorating economic conditions, a counter-cyclical tightening forced on the central bank by capital flight and inflation together with a collapse of commodity prices that … undermined the country’s trade position. The result was a simultaneous deterioration in the local equity market and currency that, at its worst point in early 2016, destroyed almost 80% of the IBOV index,” according to Marketfield Asset Management note posted by Dimitra DeFotis of Barron’s.
While there can be no guarantees of more rate cuts in Brazil, some traders are betting on more coming later this year or next year.
Related: How Central Banks Affect LatAm ETFs
It seems Brazil ETFs are reflecting as much. On Thursday, just 19 ETFs hit 52-week highs, but six Brazil funds, including the aforementioned EWZ, were among that group.
“Of course there are dangers ahead. Brazil’s domestic inflation rate has been running at a high level, but this should be helped by the strong recovery of the BRL. Unemployment has also risen considerably and both personal and corporate credit delinquency are much higher than they were 3 years ago,” according to the Marketfield note posted by Barron’s.
For more information on the Brazilian markets, visit our Brazil category.
iShares MSCI Brazil Capped ETF (NYSEArca: EWZ)
