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Bulls Bank On Brazil Again

Brazil, Latin America's largest economy, is lowering interest rates and the Senate there recently passed much-needed pension reform. With those factors, among others, in mind, perhaps it's not surprising some professional investors are again warming to Brazilian equities.

What Happened

The iShares MSCI Brazil Capped ETF (NYSE: EWZ) is up 18.53% year to date, a gain that's well ahead of the 9.88% returned by the MSCI Emerging Markets Index. EWZ has a three-year standard deviation of 28.48%, also well above that of the MSCI Emerging Markets Index, but this year, Brazilian stocks are justifying the added risk.

EWZ's bullishness is all the more impressive when considering that the fund allocates more than 36% of its weight to the financial services sector, a group that, in theory, should respond poorly to declining interest rates. Additionally, oil prices have been under pressure, but that hasn't pinched stocks in Brazil, a major crude producer.

Why It's Important

With President Jair Bolsonaro pushing a reform-minded agenda and realizing success on some fronts, investors believe the stage is set for more upside in Brazilian equities.

“With pension reform out of the way, Economy Minister Paulo Guedes is expected to present a new agenda to Congress this week that focuses on tackling Brazil’s budget woes,” according to Bloomberg. “It will probably include an administrative reform that restructures the civil service and cuts initial salaries, and may create a fiscal council to oversee federal, state and municipal budgets.”

At just 15.43 times earnings, EWZ reflects the value proposition being offered by many developing but with arguably more growth potential.

“Brazil is Schroders Plc’s preferred stock market in the region, according to Pablo Riveroll in London, the head of Latin American equities at the firm,” according to Bloomberg.

Year to date, EWZ is topping all of major single-country ETFs representing Latin American economies and is beating the S&P Latin America 40 Index by more than 1,200 basis points.

What's Next

Some institutional investors are particularly bullish on Brazilian consumer discretionary, industrial and health care stocks. Those sectors combine for about 16% of EWZ's weight.

Most pros are tepid regarding Brazilian banks, but some like the country's consumer staples and utilities names, groups that combine for 17% of EWZ's roster.

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