Among emerging markets single-country exchange traded funds, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest Brazil ETF trading in the U.S., was significantly less bad than rivals last year. Much of EWZ’s less-bad-by-comparison performance had to do with the October election of Jair Bolsonaro as the country’s newest president.
Bolsonaro has promised wide-ranging reforms aimed at stomping out corruption in Latin America’s largest economy. His ability to make good on the promised reforms is seen as pivotal to the fortunes of Brazilian assets in 2019. Brazil’s economy is expected to post GDP growth of just over 2% this year and 2.7% in 2020.
Previous administrations have promised reforms in Brazil, only to leave investors disappointed. Still, EWZ gained almost 11% in the first week of 2019, indicating some market participants have faith in Bolsonaro’s ambitious agenda.
“The appointment of Chicago-trained economist as Brazil’s Finance Minister Paulo Guedes has been largely welcomed by markets,” said Morningstar in a recent note. “Pensions is one key area of reform he has already identified, with pension costs currently represent 55% of primary government spending. Tax cuts and simplifying the tax system is another area of focus.”
Markets observers were optimistic that Bolsonaro’s economic cabinet, led by former investment banker Guedes, will push through reforms needed to cut down the country’s 180 billion reais, or $47.31 billion, deficit and restore confidence and growth to the ailing economy.
Post-Recession View
From 2014 to 2016, Brazil, Latin America’s largest economy, mired in a recession. Since then, economic growth there has been tepid.
“After a recession between 2014 and 2016, the pace of Brazil’s economic recovery since has been ‘sluggish’,” according to Morningstar. “However, there’s cause for optimism here. Analysts at Bank of America Merrill Lynch expect the country’s post-election rally, which saw the Bovespa index jump 11% in the third quarter, to continue.”
As his first acts in office, Bolsonaro fulfilled his campaign trail promises among the farming community, declaring that indigenous land claims would be decided by the Agriculture Ministry. This boon for the powerful agribusiness sector also enraged environmentalists whom were worried about further loosening protections of the Amazon rainforest and the country’s withdrawal from the Paris Agreement on climate change.
“Growth for 2019 is predicted to come in at 3% by Aviva, while inflation is set to remain subdued as it moves modestly above 4% towards the end of the year. This will support an accommodative stance from the central bank, they add,” according to Morningstar.
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