One of the brightest stories in this year’s resurgence for emerging markets equities and ETFs has been Brazil.
For much of this year, Latin America’s largest economy has been home to one of the world’s best-performing equity markets.
However, clouds are again surfacing for Brazilian stocks and the once scorching hot iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities. EWZ is still up 58% year-to-date, an undoubtedly impressive performance, but the ETF has tumbled more than 8% over the past week and is dangerously close to falling to its 200-day moving average.
Related: Brazil ETFs Roar Back as Government Incompetence Ends
Last month, 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.
Earlier this year, EWZ surged on optimism that President Dilma Rousseff will finally be removed from office and that a new administration may steer the economy toward growth. Brazilian markets strengthened on hopes that acting President Michel Temer, who will remain as the country’s leader if the Senate decides to impeach Rousseff, will be to renew economic growth and damp corruption that has long plagued the Brazilian economy.
[related_stories]As is the case with Mexico, Brazil is seen as potentially vulnerable to President-Elect Donald Trump’s trade policies.
“At a time when Brazil’s economy is experiencing its worst recession in decades, threatened by a new fiscal retrenchment, Donald Trump’s victory opens the possibility for a disruption of global trade, Brazil’s last hope for a revival. Although Brazil doesn’t have any free-trade agreements with the US which could be put in jeopardy, almost one fifth of its exports go to China, which could certainly see its own international trade suffer,” according to a Seeking Alpha analysis of Brazil.
SEE MORE: Brazil ETFs Strengthen on Realistic Government Guidance
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.
“With Brazilian consumers cutting their spending fast and unemployment almost doubling from a couple of years ago, the export sector is the only one left which can save the country from a deeper dive into the abyss,” adds Seeking Alpha.
For more information on the Brazilian markets, visit our Brazil category.
iShares MSCI Brazil Capped ETF (NYSEArca: EWZ)
