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Long-term investors are seeing a bullish case in Brazilian stocks



Investors looking for a potential opportunity to buy into Latin America’s largest economy at a discounted rate may want to consider the recent struggles in Brazilian stocks. Bovespa, the country’s stock index, is down about 9% year to date and fell roughly 3% in May, marking its worst May performance since 2018. The iShares MSCI Brazil ETF (EWZ) has also been under pressure, losing 15% year to date and 5% in May. These declines have come as expectations for a Federal Reserve rate cut in the U.S. have been pushed back, which can impact global markets as many countries, including Brazil, have dollar-denominated debt.

Leonard Linnet, head of equities at Itaú Unibanco, highlighted the impact of interest rates in the U.S. on Brazil, stating that it’s been challenging to make a case for Brazilian stocks. However, as the probability for a rate cut in the U.S. increases, Brazil may see a rebound. Factors that could contribute to this include an attractive valuation and investor positioning. Brazilian stocks are currently trading at low valuations, with the Bovespa index and EWZ trading around 7 times trailing 12-month earnings, compared to 14 times earnings for the iShares Emerging Markets ETF (EEM). This discount is even greater compared to the S & P 500, which trades at about 24 times earnings.

One reason for the depressed valuations in Brazilian stocks could be attributed to commodity price weakness, with soybeans, a major export, down more than 7% year to date. However, company fundamentals are expected to improve, with analysts forecasting revenue growth of 3.2% in 2024 following a decline of 9.8% in 2023. Earnings are also projected to grow by 0.9% this year, compared to a decline of 22.3% in 2023. Another potential catalyst for Brazilian stocks is stronger consumer spending, with the Brazilian consumer expected to be the main driver of economic growth this year due to factors such as a resilient labor market, greater credit origination, and higher minimum wages.

Investors in the U.S. seeking exposure to Brazilian stocks can consider options such as the EWZ ETF, its small-cap counterpart, the EWZS, or U.S.-listed shares of Brazilian companies like Vale and Petrobras. Itaú, the largest money manager in Latin America, reported personal loans growing by more than 11% from the year-earlier period, indicating potential for further growth. However, if the Fed does not cut rates as expected, Brazil’s stock market could face increased pressure. Despite this, for longer-term investors, it may be a good time to invest and wait for rates to come down.

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