ETF Trends
ETF Trends

After slumping a bit earlier this month amid the sell-off in global equities, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, bounced back in epic fashion, surging about 8% last week.

Some market observers believe there is still upside to be had with EWZ and Brazilian stocks. Last year, EWZ trailed the widely followed emerging markets benchmark. Surging commodities prices, thanks to a weak dollar, are among the catalysts boosting Brazilian equities early in 2018.

“Selling pressure over the last few weeks has shaved roughly 10% off of EWZ’s share price, but the ETF looks to be finding a bottom. A breakout above $44.2 would be significant due to its recent consolidation pattern. Global equities look to be recovering, and with it, EWZ could potentially show relative leadership due to its economic fundamentals,” according to a Seeking Alpha analysis of EWZ.

Brazil, Latin America’s largest economy, is a major producer of an array of commodities, including iron ore, oil and sugar, meaning a weak dollar benefits Brazilian commodities producers. That much is evident as the real has surged against the greenback since early 2017. Additionally, Brazil’s central bank actively reduced borrowing costs last year and is expected to continue doing so in 2018. Plus, Brazilian stocks appear cheap relative to global benchmarks.

“While developed market economies are raising interest rates currently, Brazil is actually in an monetary policy easing cycle. A combination of declining inflation and slower-than-expected economic growth is leading policymakers to ease rates. In fact, over the last two years, Brazil’s key lending rate has declined by roughly 50%, from 14%, to now 6.75%. Low interest rates should continue to support equity market strength,” notes Seeking Alpha.

Brazil is undergoing massive reforms, including a 20-year constitutional spending cap tied to inflation, which has helped bring the economy out of a deep recession and strengthened investment confidence. The country now is working on passing pension reforms. Meanwhile, the Brazilian market is enjoying an acceleration in earnings growth.

“Specifically, Brazil’s economy is in a monetary easing cycle, with low inflation and rising employment. Brazil is similarly trading at much more depressed levels than many of its developed and developing market peers,” according to Seeking Alpha.

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