Brazil stocks and ETFs have so far had a stellar year as evident from the 14.5% rally in iShares MSCI Brazil Capped ETF (EWZ - Free Report) versus the S&P 500’s 12.1% and the emerging market ETF iShares MSCI Emerging Markets ETF’s (EEM - Free Report) 9.3% (see Emerging Markets Most Crowded Trade Ever: 5 Hottest ETFs).
In fact, Brazil’s market has been trending up over the past six months (40% gains by EWZ). The ascent is being primarily fueled by the win of far-right and investor-friendly candidate Jair Bolsonaro in the first round of presidential election held on Oct 7, 2018. He became the president on Oct 28 with 55% of the votes, defeating leftist Workers’ Party candidate Fernando Haddad.
Pension Reform on the Table
Bolsonaro has been tirelessly pushing for a rework of the pension bill, even before he took office on Jan 1, 2019. And now, the Brazil market is at an all-time high on hopes that a pension reform will be passed in the first half of the year. The reform is expected to save more than 1 trillion reais ($300 billion) over the next 10 years.
US-China Trade War a Boon
Soy exports from Brazil were up 85.2% year over year in the first two months of 2019, per data from BIMCO, as U.S. soy exports to China have taken a hit due to the trade war (read: US-China Close to a Trade Deal? High-Beta & Risky ETFs to Tap).
The Fed has decided to adopt a dovish stance regarding the rate outlook. This has weakened the greenback to a large extent. Moreover, jobs data came in weaker than expected. There was also a nominal rise in U.S. producer prices in February. All these data points make the case for a dovish Fed stronger. This is going to keep the U.S. currency subdued in the coming days and favor the Brazilian real.
What Lies Ahead?
Market observers believe that Brazil’s growth this year is likely to be mainly driven by simulative monetary policy and “investor optimism that Congress won’t dilute Bolsonaro’s social security reforms too much.” Bolsonaro is also promising a tax cut and increase in privatizations across a wide range of sectors.
ETFs in Focus
These factors lifted Brazil equities to an all-time high on Mar 14. iShares MSCI Brazil Small-Cap ETF (EWZS - Free Report) was up more than 0.4% and EWZ rose 1.1% (read: What EM Shock? Brazil ETFs Soar on Election Optimism).
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