The recent struggles in Brazilian stocks present a potential opportunity for investors to enter Latin America’s largest economy at a discounted price. The Bovespa, Brazil’s stock index, has seen a year-to-date decline of approximately 9% and a monthly drop of around 3%. These figures mark the worst May performance for the benchmark index since 2018. The iShares MSCI Brazil ETF (EWZ) has also faced pressure, with a 15% decrease year to date and a 5% dip in May.
One of the key factors impacting Brazilian stocks is the uncertainty surrounding Federal Reserve rate cuts. Changes in benchmark rates in the U.S. have a ripple effect on global markets, including Brazil, where a significant portion of debt is dollar-denominated. Elevated rates in the U.S. typically lead to a stronger dollar, making it more expensive for countries like Brazil to service their debt.
Leonard Linnet, head of equities at Itaú Unibanco, emphasized the challenge posed by interest rates on the market’s performance. However, the probability of a rate cut in the U.S. later in the year could potentially spur a rebound in Brazilian stocks.
Despite the current downtrend, there are positive signs for Brazilian stocks, such as attractive valuations and investor positioning. Compared to other emerging markets, Brazilian stocks appear undervalued, with both the Bovespa index and EWZ trading at approximately 7 times trailing 12-month earnings. In contrast, the iShares Emerging Markets ETF (EEM) is trading at about 14 times earnings, while the S&P 500 is trading at around 24 times earnings.
Ed Yardeni of Yardeni Research noted that the depressed valuations in Brazilian stocks may be linked to weakness in commodity prices. The declining prices of key exports like soybeans have contributed to the country’s economic challenges. Despite this, Yardeni remains optimistic, forecasting a substantial turnaround in company fundamentals.
Analysts anticipate a growth rebound in Brazil, with revenue and earnings projections showing positive trends for 2024. This turnaround is expected to follow a decline in revenue and earnings in the previous year. Stronger consumer spending is also expected to drive economic growth in Brazil, supported by factors such as a resilient labor market, higher credit origination, and increased minimum wages.
Morgan Stanley economists highlighted the pivotal role of the Brazilian consumer in boosting economic growth. Itaú, a leading money manager in Latin America, reported significant growth in personal loans and expressed confidence in continued growth prospects. The positive trend in personal loans is indicative of a healthy consumer credit environment, which bodes well for future economic growth.
Investors looking to capitalize on the potential rebound of Brazilian stocks can consider various options. The EWZ ETF and its small-cap counterpart, the EWZS, provide exposure to Brazilian stocks with a manageable expense ratio of 0.59%. Additionally, U.S.-listed shares of Brazilian companies like Vale and Petrobras offer alternative investment avenues.
Vale, a mining giant, has seen a decline in American depositary receipts (ADRs) this year but also offers an irregular dividend yielding approximately 10.9%. Petrobras, an oil and gas producer, has experienced a 3% loss in ADRs year to date but boasts a 15.6% yield. However, the future performance of Brazilian stocks remains contingent on external factors like Federal Reserve rate decisions.
The current challenges facing Brazilian stocks present a unique opportunity for investors to consider entering the market at an advantageous price point. Despite the recent struggles, there are positive indicators pointing towards a potential rebound in Brazilian stocks. Factors such as attractive valuations, anticipated growth in company fundamentals, and increased consumer spending offer a hopeful outlook for the Brazilian economy. Investors should carefully weigh the risks and rewards associated with investing in Brazilian stocks amid the evolving market conditions.