Brazilian stocks have been facing a challenging year so far, with the Bovespa index down about 9% year to date and the iShares MSCI Brazil ETF (EWZ) losing 15% in the same period. These recent struggles have raised concerns among investors, especially as the Federal Reserve’s rate cut expectations have been pushed back. With benchmark rates in the U.S. having a significant impact on global markets, including Brazil, it is essential to consider the implications of these developments.
Despite the current downtrend, there are several factors that could potentially boost Brazilian stocks in the near future. One of the key factors is the attractive valuation of Brazilian stocks compared to other emerging markets. The Bovespa index and EWZ are currently trading around 7 times trailing 12-month earnings, significantly lower than the iShares Emerging Markets ETF (EEM), which trades at about 14 times earnings. This valuation discount becomes even more apparent when compared to the S & P 500, which is trading at about 24 times earnings. The low valuations of Brazilian stocks could provide an opportunity for investors looking to capitalize on potential upside.
Analysts have highlighted that the recent weakness in commodity prices, such as soybeans and crude oil, may have contributed to the depressed valuations of Brazilian stocks. However, there are positive signs indicating a potential turnaround in company fundamentals. Analysts’ consensus revenue forecasts for companies in Brazil’s MSCI index suggest a growth of 3.2% projected for 2024, following a 9.8% revenue decline in 2023. Expected earnings growth of 0.9% in 2024 also signals a potential improvement compared to a decline of 22.3% in 2023. These forecasts could attract investor interest and contribute to a positive sentiment towards Brazilian stocks.
Another potential catalyst for Brazilian stocks is the expected increase in consumer spending. Economists at Morgan Stanley have highlighted that the Brazilian consumer is likely to be the main driver of economic growth this year, supported by factors such as a resilient labor market, greater credit origination, and higher minimum wages. Itaú, a prominent money manager in Latin America, reported a significant growth in personal loans earlier in the year, indicating a positive trend in consumer behavior. This growth potential in consumer spending could further fuel the performance of Brazilian stocks in the coming months.
For investors looking to gain exposure to Brazilian stocks, there are several options available. The EWZ ETF and its small-cap counterpart, the EWZS, provide a convenient way for U.S. investors to access the Brazilian market with an expense ratio of 0.59%. Additionally, U.S.-listed shares of Brazilian companies, such as Vale and Petrobras, offer alternative investment opportunities. Vale’s American depositary receipts have seen a decline of 24% year to date but currently offer an irregular dividend yielding 10.9%, according to FactSet. Petrobras, on the other hand, has lost 3% but provides an irregular dividend yielding 15.6%. These investment options allow investors to diversify their portfolios and potentially benefit from the growth prospects in the Brazilian market.
Recent struggles in Brazilian stocks present an opportunity for investors to consider buying into Latin America’s largest economy at a discount. While the challenges posed by the Federal Reserve’s rate cut expectations and commodity price weakness remain valid concerns, there are positive factors such as attractive valuation, improving company fundamentals, and strong consumer spending outlook that could drive the rebound in Brazilian stocks. By carefully analyzing these factors and exploring investment opportunities, investors can position themselves to benefit from the potential upside in Brazilian stocks in the months ahead.