ETF Trends
ETF Trends

After ranking as one of last year’s best-performing single-country exchange traded funds, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, is on a tear again this year.

EWZ is up more than 13% to start 2017 and there are potential catalysts that could carry the once downtrodden Brazil ETF to even larger gains. Brazil’s central bank could be of assistance with more interest rate cuts, something that has happened twice in the latter stages of 2016.

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.

The rebounding real currency is also helping matters.

“The strong real (NYSEARCA:BZF) brings more benefits than damage to the Brazilian economy at this particular point in its business cycle. The boost from easier USD funding is much greater than any setback caused from reduced competitiveness. The anticipation of this positive net effect on the economy fuels the rebound in Brazilian equities and can continue to do so,” according to a Seeking Alpha analysis of Brazil.

Banks in Latin America’s largest economy appear inexpensive, those institutions are faced with declining consumer credit quality. Analysts believe the same is true of Brazilian banks. After a couple of years of contracting, Brazil’s economy is expected to resume growing this year, a factor Brazilian stocks and ETFs could already be pricing in.

Financials are the largest sector weight in EWZ at more than double the allocation assigned to the ETF’s second-largest sector weight.

“The Brazilian economy remains deeply stigmatized by its fundamental credibility problem in regards to public finances. The turn from a vicious recessionary cycle to a virtuous growth cycle will definitely require a herculean effort by Brazilian policy makers and business people. However, easier USD funding due to a generalized reflationary trade, coupled with a solid commodities rally, and a friendly central bank, offer an unexpected boon to this economy,” adds Seeking Alpha.

For more information on the Brazilian markets, visit our Brazil category.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.