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Does Brazil’s Valuation Support Mark Mobius’s Statement?

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Brazil’s recent performance

A series of problems, such as spiraling unemployment, high inflation, political turmoil, stagnant economic growth, a high fiscal deficit, a deep recession, and downgrades from rating agencies, are affecting the growth of the Brazilian (EWZ) economy.

The fall in commodity prices (DBC) (BCX) and political turmoil in Brazil have led to a contraction in the economy. On a year-over-year basis, Brazil’s GDP fell by 5.4% in 1Q16. It was the eighth consecutive quarter of contraction in the economy. Most Latin American (ILF) economies’ performances were hammered due to the fall in commodity prices.

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However, the iShares MSCI Brazil Capped ETF (EWZ), which tracks the performance of Brazil, showed a strong performance. On a YTD (year-to-date) basis, the ETF had returned 46% as of June 30, 2016. The reversal in commodity prices boosted the performance of the Brazilian index. According to Mark Mobius, the consumerism of the Brazilian economy will drive growth, and Brazil looks very cheap. Let’s look at whether the valuation of the country supports this.

Valuations of the Brazilian index

The Brazilian Bovespa index is currently trading at a PE (price-to-earnings) multiple of 13.4x. It looks cheaper than other Latin American economies. Mexico (EWW) is currently trading at a PE multiple of 19x, Chile (ECH) is trading at 15x, and Argentina (ARGT) is trading at 19x. The index fell 26.6% from its high of 18.4x in October 2013 to 13.5x in June 2016. During October 2013, commodity prices supported a rally in the index. Currently, EPS (earnings per share) growth is showing little improvement. If the commodity prices maintain their uptrend, Brazil’s EPS growth could be supported. In the next part of this series, we’ll analyze valuations and possible investment opportunities in Russia (RSX).

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