Brazil’s stock market’s recent woes could be an opportunity for investors to buy into Latin America’s largest economy at a discount. The country’s stock index is down about 9% so far this year and about 3% last month. It was the benchmark index’s worst May performance since 2018, when it fell nearly 11%. The iShares MSCI Brazil ETF (EWZ) is also under pressure, down 15% year to date and down 5% in May. The declines came as expectations for a rate cut by the Federal Reserve this year were postponed. U.S. benchmark interest rates have an impact on global markets because many countries, including Brazil, have dollar-denominated debt. Rising U.S. interest rates tend to push the dollar higher, making it more expensive for countries to repay their debt. “It’s difficult to make the case for Brazil because of interest rate issues, especially in the United States,” 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 likelihood of a rate cut increases — maybe in September, maybe in October — I do think Brazil can bounce back.” There are other factors that could boost Brazilian stocks going forward, including attractive valuations and investor positioning. With low valuations and strong consumption, Brazilian stocks are very cheap, especially compared to other emerging markets. The Bovespa Index and EWZ both trade at around 7 times trailing 12-month earnings. Meanwhile, the iShares Emerging Markets ETF (EEM) trades at about 14 times earnings. This discount is larger relative to U.S. equities, with the S&P 500 trading at about 24 times earnings. Yardeni Research’s Ed Yardeni noted last month that depressed valuations could be a byproduct of weak commodity prices. The price of soybeans, one of Brazil’s largest exports, has fallen more than 7% so far this year. Meanwhile, crude oil prices were set to rise 7% in 2024, but have fallen 7% since the end of March. But Yardeni said in the report that “in a beacon of hope in this difficult situation, the company’s fundamentals are expected to improve significantly this year.” “Analyst consensus revenue forecasts for Brazil’s MSCI companies overall suggest revenue is expected to grow 3.2% in 2024, while revenue will decline 9.8% in 2023. Revenue is expected to rise 0.9% in 2024, while revenue will decline 22.3% in 2023 “. Another catalyst for Brazilian stocks could be stronger consumer spending. Morgan Stanley economists say Brazilian consumers will be the main driver of economic growth this year, citing: Resilient labor market Greater sources of credit Higher minimum wage Itau is Latin America’s largest money manager , which had assets of more than $555 billion last year, said in early May this year that personal loans were up more than 11% from the same period a year earlier, and Chief Financial Officer Alexsandro Broedel expects this trend to likely continue. “Our delinquencies are under control, so I think we’re in a good position to grow this year,” Brodeur told CNBC. How to Invest U.S. investors can get Brazilian stocks through the EWZ ETF and its small-cap EWZS investment. The expense ratio of the two funds is 0.59%. Another way is through shares of U.S.-listed Brazilian companies, such as mining giant Vale and oil and gas producer Petrobras. Vale’s American depositary receipts are down 24% year to date, although they also pay irregular dividends and currently yield 10.9%, according to FactSet. Petrobras fell 3%, but its ADR yield reached 15.6%, which is also abnormal. Vale 2024 YTD Vale What is certain is that if the Federal Reserve does not cut interest rates this year as expected, Brazilian stocks may come under greater pressure. Entering 2024, global investors expect the Federal Reserve to start cutting interest rates in March. The first rate cut is currently not expected until September, according to CME Group’s FedWatch tool. “This is a big blow to Brazil and emerging markets in general,” said Itaú’s Linnet. But for long-term investors, “it might be time to put money in and wait for interest rates to come down.”
