The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, is once again setting a torrid pace with a year-to-date of about 15%. Some market observers believe stocks in Latin America’s largest economy can keep climbing.
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.
In fact, Brazil’s central bank recently unveiled a larger-than-expected interest rate hike that likel sets the stage for more of the same this year.
“Combine the prospects for interest-rate cuts with their higher carry-trade returns and two countries stand out as the best bets this year in emerging markets: Brazil and Russia,” reports Bloomberg. “In a survey of 16 investors and analysts conducted Jan. 23 to Feb. 1, the nations’ bonds and currencies got the strongest backing among 10 developing economies. China was the least favored.”
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.
“Since we affirmed Brazil’s ‘BB’/Negative sovereign rating in November, the Temer administration secured congressional approval for a spending cap and introduced a social security reform bill. Inflation has fallen further, and the 2016 current account deficit shrank to 1.3% of GDP, reflecting broad import compression from the economic recession and BRL depreciation. However, GDP contracted for the seventh consecutive quarter in 3Q16 and the 2016 public sector deficit remained elevated at 8.9% of GDP,” said Fitch Ratings in a recent note.
Some investors are reevaluating Brazilian stocks, something that has benchmark indexes there trading at the highest multiples in a decade. However, Brazilian assets can be more appealing with the help of a weaker dollar and stronger commodities prices.
“Fitch forecasts Brazil to exit recession this year, but the 3Q16 GDP reading (down 2.9% yoy) showed weakness in investment and consumption. The continuing decline in inflation, which dropped to 5.35% in January, and inflation expectations, gives Banco Central do Brasil room to ease monetary policy further following its 75 bp cut in January,” adds the ratings agency.
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