The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking stocks in Latin America’s largest economy, has recently been surging as the first round of the country’s presidential election looms. Still, EWZ is lower by 18.50% year-to-date, making it one of the worst-performing single-country emerging markets this year.
Some analysts and market observers believe the election, slated for October, could bring undesired uncertainty regarding Brazil’s fiscal and structural reforms.
“Brazil’s forthcoming presidential and congressional elections will be key for determining the pace, scale and nature of future fiscal and structural reforms,” says Fitch Ratings. “Without sustained reforms, fiscal deficits will remain high and government debt dynamics adverse, further weighing on broader investor confidence and economic activity.”
Election Impact
There are several reasons why the upcoming Brazilian elections are relevant to local and foreign investors.
“The results of the election will set the medium-term backdrop for economic and fiscal policy, with multiple presidential candidates across the political spectrum advocating markedly varied platforms,” according to Fitch. “Close opinion polls and a two-round electoral process for the presidency make the outcome unpredictable, with multiple potential policy scenarios. A fragmented Congress and potential difficulties in forming a workable legislative coalition could also add to political uncertainties under the new administration. Notably, some of the leading candidates belong to smaller parties, which may add to challenges in working with the new Congress.”
Some market observers believe Brazil, while one of the most volatile emerging economies as measured by EWZ’s standard deviation, is one of the most compelling opportunities in Latin America.
“Sustained failure to address fiscal issues leading to rapid growth in the government’s debt burden would be a negative credit factor. Similarly, deterioration in the sovereign’s domestic and/or external market access conditions would weigh on the ratings. Fitch downgraded Brazil’s rating to ‘BB-‘ from ‘BB’ in February 2018 and revised the Negative Outlook to Stable,” according to Fitch.
Despite the difficulty in predicting the next president, there are still constructive drivers that should benefit stocks over the next few months. For instance, J.P. Morgan expects Brazil to post the best corporate earnings growth in 2018 among Latin American peers. Additionally, a number of its industries are linked to commodities, which benefit from a weaker real currency.
For more information on the Brazilian markets, visit our Brazil category.