Recent struggles in Brazilian stocks could be an opportunity for investors to buy into Latin America’s largest economy at a discount. Bovespa , the country’s stock index, is down about 9% year to date and fell roughly 3% last month. That marked the benchmark’s worst May performance since 2018 — when it dropped nearly 11%. The iShares MSCI Brazil ETF (EWZ) is also under pressure, losing 15% year to date and 5% in May. Those declines come as expectations for a Federal Reserve rate cut this year have been pushed back. Benchmark rates in the U.S. have an impact on global markets because many countries — including Brazil — have dollar-denominated debt. Higher rates in the U.S. tend to strengthen the dollar, making it more expensive for countries to pay down their debt. .BVSP YTD mountain Bovespa year to date “It’s been hard to make a case for Brazil because of interest rates, especially in the U.S.,” Leonard Linnet, head of equities at Itaú Unibanco, told CNBC at the bank’s Latam CEO conference in New York in May. “But as [the] probability increases for a rate cut — maybe in September, maybe in October — I do think Brazil can rebound.” There are also other factors that can boost Brazilian stocks going forward, including an attractive valuation and investor positioning. Low valuations and strong consumer Brazilian stocks are very cheap, especially compared to the other emerging markets. The Bovespa index and EWZ are both trading around 7 times trailing 12-month earnings. The iShares Emerging Markets ETF (EEM) , meanwhile, trades at about 14 times earnings. That discount is even greater relative to the U.S., with the S & P 500 trading at about 24 times earnings. Ed Yardeni of Yardeni Research noted last month that those depressed valuations could be a byproduct of commodity price weakness. The price of soybeans, one of Brazil’s biggest exports, is down more than 7% year to date. Crude oil, meanwhile, is up 7% in 2024, but has dropped 7% since the end of March. But in a “beacon of hope in a sea of troubles, company fundamentals are expected to stage a substantial turnaround this year,” said Yardeni in a note. “Analysts’ consensus revenue forecasts for companies in Brazil’s MSCI index collectively indicate growth of 3.2% projected for 2024, which would follow a 9.8% revenue decline in 2023. Expected earnings growth of 0.9% in 2024 compares with a decline of 22.3% in 2023.” Another catalyst for Brazilian stocks may be stronger consumer spending. Economists at Morgan Stanley pointed out that the Brazilian consumer will be the main driver of economic growth this year, citing: A resilient labor market Greater credit origination Higher minimum wages Itaú, the largest money manager in Latin America with more than $555 billion in assets last year, said earlier in May that personal loans grew by more than 11% from the year-earlier period, a trend that CFO Alexsandro Broedel expects can continue. “Our delinquency ratios are under control, so I think we are in a good position to grow over the year,” Broedel told CNBC. How to invest Investors in the U.S. can gain exposure to Brazilian stocks via the EWZ ETF and its small-cap counterpart, the EWZS. Both funds have an expense ratio of 0.59%. Another way is through U.S.-listed shares of Brazilian companies, such as mining giant Vale and oil and gas producer Petrobras . Vale American depositary receipts are down 24% year to date, although they also pay an irregular dividend currently yielding 10.9%, according to FactSet. Petrobras has lost 3% but its ADRs yield 15.6%, also irregular. VALE YTD mountain Vale in 2024 To be sure, if the Fed does not cut rates as expected this year, Brazil’s stock market could fall under even more pressure. Entering 2024, investors around the world expected the Fed to start cutting rates in March. Now, the first rate decrease isn’t anticipated until September, according to the CME Group’s FedWatch tool. “That’s been the big upset for Brazil and emerging markets as a whole,” Itaú’s Linnet said. But for a longer-term investor, “it may be time to put money to work and wait for when rates come down.”
There’s a bull case emerging in Brazilian stocks for long-term investors
Jun 2, 2024
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