More to Come for Brazil ETFs? Maybe

The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Latin America’s largest economy, is up more than 65% year-to-date as Brazil is home to one of the world’s best-performing equity markets. That does not mean Brazilian equities can’t keep delivering upside.

Making the rally in Brazilian stocks all the more impressive is the fact that the rebound comes against the backdrop of contracting economic growth in Latin America’s largest economy. However, Brazil’s economy is expected to resume growing next year, a factor Brazilian stocks and ETFs could already be pricing in.

Related: Brazil ETFs Roar Back as Government Incompetence Ends

Some market observers believe Brazil can continue improving, but issues linger.

“We now expect GDP to contract by 3.5% this year, followed by modest growth of around 0.5% next year. We expect the recovery will be primarily led by private investment, a function of rising business confidence and the need to increase production to replenish depleted inventories,” according to a Moody’s Investors Service note posted by Dimitra DeFotis of Barron’s.

Some investors are reevaluating Brazilian stocks, something that has benchmark indexes there trading at the highest multiples in a decade. However, Brazilian assets became more appealing this year thanks to the weaker dollar, stronger commodities prices.

Another potential catalyst for Brazilian stocks, though further down the road, is the possibility of lower interest rates. At 14.25%, Brazil has some of the highest borrowing costs in the world.

Related: How Central Banks Affect LatAm ETFs

“Nonetheless, positive trends taking hold in the industrial sector support our view that investment is recovering. While industrial production (IP) is still falling on a YoY basis, the fact that IP recorded 5 straight months of month-on-month growth through July supports this expectation,” according to the Moody’s note posted by Barron’s.

After several years of dismal performances, Latin America exchange traded funds are roaring back in 2016 and have actually been leaders of the emerging markets resurgence. Rebounding commodities prices and the weaker dollar are key reasons why Latin America ETFs are rebounding. Brazil hosted the Summer Olympics earlier this year, which could be a catalyst though the jury is still out on that.

After the Summer Olympics, though, the index of the host country typically outperforms the global benchmark over the next one-year period. Based on recent historical data of the past eight Summer Olympics, the average percentage change of the local index one year after the closing ceremony was 23.8%, compared to the 10.7% change of the MSCI World Index, according to FactSet.

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

iShares MSCI Brazil Capped ETF

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.

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