Bullish on Brazil? Why it Could be a Leading Emerging Market

MarketsETF Trends

The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, entered Monday with a year-to-date gain of 12.6%. Although that is off the recent highs set by the fund, some market observers believe Brazil could be a leading emerging market before 2018 is over.

To start 2018, EWZ is outpacing the MSCI Emerging Markets Index by a 2-to-1 margin. 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.

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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.

“With the recovery in commodity prices, exiting of the recession in Q1 2017, and the easing political tensions with the former impeached president’s corruption charges being upheld in an appeals court in early January the Brazillian Real has surged by nearly 50%,” according to a Seeking Alpha analysis of EWZ and Brazil’s economy.

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.

“On a relative basis, Brazil is trading at a significant discount compared to similar emerging market economies, the United States, and a vast majority of global indices,” according to Seeking Alpha. “Historically emerging markets like Brazil have traded at a discount compared to indices in the United States. The discount signifies the degree of risk associated with these markets.”

Analysts expect Brazil’s economy to grow modestly this year before posting more impressive growth figures in 2018. Still, that is better than the recently ended recession, which plagued Brazilian assets.

Traders who are betting on a quick turnaround could look to the two times leveraged ProShares Ultra MSCI Brazil (NYSEArca: UBR) or the three times leveraged Direxion Daily Brazil Bull 3x Shares (NYSEArca: BRZU). On Wednesday, BRZU was the best-performing US-listed ETF on an intraday basis.

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

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