From Zacks: Brazilian stocks and ETFs have been a tear with large-cap Brazil fund iShares MSCI Brazil Capped (EWZ) adding over 100% in the last one year (as of February 14, 2017) and advancing about 17% so far this year.
Hopes of new reforms that can shore up the country’s recession-stricken economy after the subsequent impeachment of president Dilma Rousseff, commodity strength and easing inflationary pressure perked up Brazil ETFs(read: 4 Best Single-Country ETFs of 2016).
In view of cooling inflation (which was once sky-high) and soft economic growth, Brazil embarked on an aggressive policy easing cycle. The country slashed interest rates by 25 bps for the first time in four years in mid-October, giving signs of a turnaround in the long-ailing economy.
The Brazilian central bank again cut rates by 25 bps in November and 75 basis points to 13.00% in early January, surpassing market expectations of a cut of 50 bps. This boosted consumer confidence in Brazil as low rates provide some relief to debt-ridden families and perk up business sentiments (read: Top ETF Stories of January 2017).
Coming to the growth picture, the Brazilian economy contracted 0.8% quarter on quarter in Q3, in line with market expectations. This marked the seventh quarter of contraction in a row. But many economists are being bullish on Brazil investing as they expect the economy to approach growth soon. In fact, 2017 is likely to see the end of a vicious two-year recession.
Credit Suisse Securities also upgraded its 2017 gross domestic product (GDP) growth forecast for Brazil to 0.2% from zero. BNP Paribas expects the economy to growth 1% in 2017, matching government estimates.
Hopes of further rate cuts are actually giving a boost to Brazilian stocks. Consumer prices increased less than expected in Brazil in January for the fifth month in a row and is on its way to hit the target of 4.5% that the government is striving to attain since long (read: Brazil ETFs in Focus as Central Bank Cuts Rates Again).
Core Inflation Rate in Brazil was 5.60% in January of 2017. Prices grew 0.38% in January sequentially, representing the minimum rise for January since 1994, as per Reuters. Lower inflation will be helpful for President Michel Temer as he tries to clear an austerity agenda through Congress.
While all Brazil ETFs are on a steep uptrend, small and mid-cap ETFs deserve a special mention. This is because the pint-sized stocks better reflect the domestic economy. In this scenario, the following Brazil ETFs could be on investor’s radar (see all Latin American Equity ETFs here).
The fund looks to track the MSCI Brazil Small Cap Index. The fund is heavy on Consumer Discretionary (35.32%), Utilities (15.77%), Materials (12.21%), Financials (10.37%) and Industrials (10.24%).
The product follows the VanEck Vectors Brazil Small-Cap Index. The fund puts solid weights in Consumer Discretionary (29.3%), Health Care (11.8%), Materials (11.5%) and Utilities (11.4%).
Global X Brazil Mid Cap ETF (BRAZ)
The fund provides investors access to a wide array of mid cap stocks in Brazil. Utilities (19.89%), Materials (15%) and Consumer Staples (14.4%) are top three sectors of the fund.
Since consumer confidence in Brazil is rising lately, a look at the consumer sector of the Brazilian economy via BRAQ makes sense.
The iShares MSCI Brazil Index ETF (NYSE:EWZ) closed at $39.24 on Friday, down $-0.14 (-0.36%). Year-to-date, EWZ has gained 17.70%, versus a 5.17% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Zacks Research.