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Here's Why Brazil ETFs Breezing Past S&P 500 This Year

Brazil’s Bovespa stock index has gained 10% this year, while the S&P 500 is down 25% and the MSCI Emerging Markets Index has lost 30%. In Mexico, Latin America's second largest equity market after Brazil, per Wall Street Journal. This happened despite a strong greenback. Invesco DB US Dollar Index Bullish ETF UUP is up about 19.6% in the past one year (as of Oct 21, 2022).

Below we highlight why Brazil ETFs beat the S&P 500 this year.

Upbeat GDP Growth

Brazil’s gross domestic product rose 1.2% sequentially in the three months to June of 2022, beating expectations of a 0.9% uptick and extending the expansionary momentum to four successive quarters. Growth was reinforced by a 4.8% advance in gross fixed capital formation, rebounding from the 3% decline in the previous period. At the same time, household consumption rose by 2.6%, extending the 0.5% increase in the first quarter and marking the best increase in one year, per tradingeconomics.

Likelihood of Market-Friendly Outcome of Presidential Election

The rally in Brazil stocks has happened as former President Luiz Inácio Lula da Silva challenges incumbent President Jair Bolsonaro in a presidential election. At the current level, Brazil's election is going into a second round on Oct 30, 2022 in which left-winger Luiz Inácio Lula da Silva will face far-right incumbent Jair Bolsonaro.

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With almost all the votes counted, Lula had won 48% against Bolsonaro's 43% - a much closer result than opinion polls had predicted. Plus, Lula fell short of the more than 50% of valid votes needed to avoid a run-off. This gives cues of protraction of existing market-friendly economic policies.

Cheaper Valuation

Even after this year's rally, stocks in the Bovespa are priced at 7.3 times forward earnings, cheaper than the 15.3 P/E ratio in the S&P 500, according to FactSet, as quoted on Wall Street Journal. "We still think that Brazil is undervalued compared to other emerging markets and even developed markets," said Dina Ting, senior vice president and head of Global Index Portfolio Management at Franklin Templeton, the WSJ article noted.

Higher Commodity Prices

The Brazilian index has also been buoyed by rising commodity prices. Brazil is commodity-rich. Over the past two decades, Brazil has been strengthening its position as a key producer of agricultural commodities and related food products as well as a supplier to international markets. It is now a top-5 producer of 34 commodities and is the largest net exporter in the world, per USDA. Brazil also has a thriving mining industry. High food inflation and a rally in commodity prices thus went in favor of Brazilian market.

Brazilian Real Proving Strong

The Bovespa's performance is attributed in part to the Central Bank of Brazil's response to rising inflation. The bank started hiking rates early in 2021 to reach 13.75% in August. This along with a Brazilian real’s status of a dependable commodity currency has boosted its price, which is up 5% in 2022 despite a strong U.S. dollar.

ETFs in Focus

iShares MSCI Brazil ETF (EWZ) – Up 22.5% YTD

Franklin FTSE Brazil ETF FLBR – Up 21.1% YTD

First Trust Brazil AlphaDEX Fund FBZ – Up 4% YTD

iShares MSCI Brazil Small-Cap ETF EWZS – Up 0.3% YTD


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Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
 
iShares MSCI Brazil SmallCap ETF (EWZS): ETF Research Reports
 
First Trust Brazil AlphaDEX ETF (FBZ): ETF Research Reports
 
Franklin FTSE Brazil ETF (FLBR): ETF Research Reports
 
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Zacks Investment Research