The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest Brazil-related ETF listed in the U.S., slumped last week, but some market observers aren’t giving up on stocks in Latin America’s largest economy that quickly.
Last month, Brazilian equities hit record highs after the Senate Constitutional and Legal Affairs Committee approved the text of a long-waited pension reform bill, setting the stage for a second and final vote.
“Brazilian markets recently got two pieces of bad news almost at once. A supreme court decision freed leftist ex-President Luiz Inácio Lula da Silva from prison while he appeals his corruption conviction, and an offshore oil auction billed as record-breaking fizzled,” reports Craig Mellow for Barron’s.
However, as market participants work through those negative news items, EWZ could be poised to regain its bullish ways that have seen the fund outperform the MSCI Emerging Markets Index this year.
Banking On Brazil
Investor sentiment for Brazilian assets has grown more bullish as the country’s central bank is largely expected to cut the already record-low interest rates in light of the slower-than-expected economic recovery and moderate inflationary pressures. Brazil’s central bank has been active in cutting interest rates, which has boosted stocks but depressed the local currency, the real.
“Sinking interest rates also have their downside for global investors. They reduce the attraction of Brazilian bonds, which weighs on the currency and the dollar value of stocks. The real has slid 20% over the past two years. Stocks have risen 16% anyway since Bolsonaro won first-round presidential voting last October, crushing a 4% gain for global emerging markets,” according to Barron’s.
Much of the rate-cutting regime is centered around supporting Latin America’s largest economy and ending its flirtation with a recession.
Brazilian central bank’s IBC-Br economic activity index, a leading indicator of gross domestic product, dropped 0.13% in the second quarter after falling off 0.68% in the three months prior, Reuters reports.
A recession is typically defined as two or more consecutive quarters of contracting economic growth. If the central bank’s indicator is reflected by official GDP data this month, Brazil’s economy will have fallen into recession for the first time since 2016.
Brazil has suffered this year from high unemployment, weak industrial production, economic troubles in neighboring Argentina and a worsening global growth outlook due to a protracted U.S.-China trade war.
For more information on the Brazilian markets, visit our Brazil category.
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.