How Brazilian Stocks Are Keeping up with Improved Growth Expectations

Brazil’s improved growth expectations

Brazil (EWZ), the largest economy in Latin America (ILF), seems to be showing signs of improvement in 2017. Brazil’s improved manufacturing activity over the past few months has been providing a boost, and the country saw improved auto production (IOCJY) in March. A bumper harvest is also expected to boost the agricultural production in the first half of 2017.

How Brazilian Stocks Are Keeping up with Improved Growth Expectations

Brazil’s market performance

Brazil’s benchmark index (BOVESPA) has meanwhile gained about 12% so far in 2017, (as of May 12). Brazil’s economy is slowly improving after two years of recession, during which time political uncertainty had hurt consumer confidence.

But the recent change in political climate is expected to bring about much-needed economic reforms. Brazil’s government has raised its spending in an effort to lift the Brazilian economy from deep recession. The Central Bank of Brazil also recently reduced its interest rate to support the country’s recovery, and now the IMF (International Monetary Fund) is expecting a 0.5% rise in Brazil’s economic output in 2017.

The impeachment of Dilma Rousseff

The successful impeachment of Dilma Rousseff in 2016 for corruption charges has also boosted confidence in Brazilian markets. Brazil’s economy has, over the years, suffered from high levels of corruption.

The Rousseff government and its largest commodities company, Petrobras (PBR) were involved in a big scandal in 2016. However, Brazil’s new president, Michel Temer, is considered to be pro-business and expected to bring about reforms to pull the economy out of recession.

Investments

The positive changes in the political climate of Brazil have increased flows in 2016. Brazil’s currency has also seen a surge in the past year, with gains of more than 15% against the US dollar (UUP).

The attractive valuation of Brazil’s (EWZ) market as compared to the developed world (SPY) (IEV) is also increasing fund flows in Brazil. The S&P 500 is now trading at 25x its earnings, while Latin America is trading at 14.3x its earnings, according to data from Credit Suisse.

The iShares MSCI Brazil Capped ETF (EWZ) gained more than 17% in 2017 so far, outperforming the broad S&P 500 index (SPX-INDEX). The iShares MSCI Brazil Small-Cap (EWZS), which invests heavily in the consumer discretionary sector, gained about 23% in 1Q17.

Now let’s go to Argentina.