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Will Brazil Investments Rise and Add Momentum to Valuations?

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In short, investors in Brazil have already won a gold medal of sorts this year. Winning another medal will likely require a more prosaic path: a recovery of earnings on the back of the economic turnaround and effective execution on the reform front.

Investors interested in Brazil may want to consider the iShares MSCI Brazil Capped ETF (EWZ) or the iShares MSCI Brazil Small-Cap ETF (EWZS).

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Market Realist – Brazil’s foreign direct investment

Brazil’s foreign direct investment (or FDI) grew by $78 million in July 2016, which is a record low. The country’s FDI averaged $3.5 billion during 1995–2016, reaching the highest level of $20.4 billion in December 2010. Brazil’s FDI had breached the $15 billion mark in late 2015 before cooling down in 2016. Brazil is below South Korea and Mexico in terms of the latest FDI. Brazil also lags behind China and India.

Valuation of Brazil

Here we will try to compare the valuation of the Brazil index with indexes of the emerging markets, Latin America, and the BRIC nations. We’ll compare the valuations using the popular PE (price-to-earnings) multiple. The MSCI Brazil Index (or MXBR), which tracks large-cap and mid-cap stocks, and the MSCI Brazil Index (or MXBRSC), which tracks small-cap stocks, recorded PEs of 15.5x and 24.1x, respectively, as of September 6.

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The MSCI Emerging Markets Latin America Index (or MXLA), which tracks large-cap and mid-cap stocks across five emerging market countries in Latin America, recorded a PE of 16.8x as of September 6. The MSCI BRIC Index (or MXBRIC), which tracks four emerging market country indexes, recorded a PE of 13.7x as of September 6. The MSCI Emerging Markets Index (or MXEF), which tracks large-cap and mid-cap stocks across 23 emerging market countries, recorded a PE of 13.9x as of September 6, 2016. Thus, the forward PE multiple of Brazil’s MSCI Small Cap Index has beaten other indexes including those for the BRIC nations and the emerging markets. Brazil’s optimistic prospects are also responsible for adding to the valuation of the Latin American index.

Going forward

Now that Brazil’s political scenario has improved and commodity prices have become more stable, the country is expected to attract investors again. Further, the IMF’s optimistic projection coupled with the right leadership could result in a goldmine. The IMF expects oil prices to improve by 16.4% in 2017 and the non-fuel commodity prices to dip marginally by 0.6% in 2017. The IMF projects that the world trade volume of the emerging markets and the developing economies will grow by 2.9% in 2016 and 3.9% in 2017. The Direxion Daily Brazil Bull 3x Shares ETF (BRZU) tracks the MSCI Brazil 25/50 Index and has a PE multiple of 13.2x. 

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