EWZ ETF

Brazil faces rising inflation and a record fiscal deficit, causing iShares MSCI Brazil ETF to drop 19% in 2024 while the S&P 500 gained 20%. The Brazilian real has deeply weakened against the U.S. dollar, driven by fiscal concerns and rising interest rates. EWZ's P/E ratio has risen to 8.5x, which remains the lowest among most emerging countries.

Brazilian equities have underperformed both global stocks and their EM counterparts quite significantly this year. EWZ is the largest Brazilian-themed ETF around, but the next largest offering - FLBR - is gaining interest and with good reason. Trading volumes in the Brazilian equity markets have come off quite significantly as the Central Bank's ongoing rate stance has made fixed income more attractive.

Market strengths here… and abroad.

Brazilian equities have gained 15.16% post-Black Monday, driven by the outperformance of financial stocks, positive external news, and mixed internal news. The largest tracking ETF is at its lowest five-year AUM, and higher risk appetites with a soft landing could attract foreign inflows at a rapid pace due to cheap valuations. Inflation deviating from the target, along with the appointment of a new central bank president, raises uncertainty. Yet, the opportunity outweighs the cons.

To invest in the Brazilian stock market, I chose the EWZ ETF because it is more liquid, even though it has fewer holdings and is more expensive than its peers. The economic prospects for Brazil are positive, and the country's stock market performance significantly lags behind its GDP growth. The lowering of Fed rates can stimulate the growth of commodity prices and emerging market stocks, including Brazil.

With changes in global geopolitics, Brazil is positioning itself as a great investment alternative in emerging markets. Brazil has strong competitive advantages in agriculture, mining and the oil industry. The country is positioned to be a big player in the energy transition. Despite its companies' excellent return on equity, EWZ trades at a 27% discount to its emerging market peers.

The iShares MSCI Brazil ETF has outperformed its emerging market peers, rising 85% since its lows in 2021. This outperformance has been driven by a narrowing of Brazil's valuation discount, and there is room for this to narrow further, supported by economic and currency stability. The EWZ, along with Brazilian assets more generally, have suffered significant outflows since 2020, and a return of foreign investors could propel the next phase of the bull market.

The iShares MSCI Brazil ETF is set for a successful year with significant gains, approaching all-time highs amid a skeptical global economic landscape. Brazil's stock market had a stellar November, driven by positive indicators like anticipated interest rate cuts and a stable exchange rate. Brazil faces fiscal challenges, with declining revenue and ongoing spending, potentially resulting in a 1% GDP deficit by year-end. Government policies resemble past interventionist strategies.

Brazil stocks are at a 20-year valuation low. Trade surplus on commodity exports supports currency. Politics and institutional dysphoria provide risk and volatility.