The tariff wars and rising interest rates are beginning to have a measurable effect on the economies of the world, with emerging economies taking the biggest hit. With one exception: Brazil. And Brazilian stocks have bucked the recent malaise that has plagued most emerging markets. More on Brazil later.
Back to the rest of the world, the International Monetary Fund has just lowered its forecasts for global growth this year to 3.7%, which is down from its April estimate of 3.9%. The IMF sees the changes in two major regional trade arrangements (NAFTA and Brexit) and the U.S. tariffs on Chinese imports as potential disruptions of global supply chains. And while the global growth forecast is down just two-tenths of a percent, the effect on emerging markets and frontier economies is likely to be harsher.
The other factor kicking emerging markets in the shins has been the strength of the U.S. dollar, a factor that raises the price of imports and puts pressure on emerging manufacturers and exporters. Turkey and Argentina have been especially hard hit by currency drops.
Since the middle of the year, the combined economic pressure on emerging economies has been a perfect cold-water bath for investors, who have been pulling money out of emerging-market ETFs at the fastest rate since January 2014. And coupled with the risk-off sentiment that has recently turned U.S. investors away from growth stocks, especially the tech stocks that have powered so much of the market’s gain over the past couple of years, the effect has been powerful.
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There are a few bright spots, though. And Brazil is the brightest spot.
Brazilian Stocks on the Upswing
Investors have taken a liking to Brazilian stocks in the wake of the first round of that country’s presidential election. Investors like the idea that Jair Bolsonaro, a far-right, ex-Army captain, is in the lead, having received almost half of the votes. Bolsonaro’s opponent in the final round of voting is Fernando Haddad, whose Workers’ Party has been hit by a graft scandal, and who took just 29% of the first-round votes.
In turbulent times, investors see a strong leader as a good hedge against uncertainty, and Bolsonaro has promised to put a former banker in charge of Brazil’s economic policy. The iShares Brazil ETF (EWZ) has shown some real strength since the September election and some Brazilian ADRs are looking attractive. Here’s a three-month chart of EWZ.
Because of the strong performance in Brazilian stocks of late, and with Chinese stocks in the throes of what’s now a four-month slide, I have just added a Brazilian ADR to my Cabot Emerging Markets Investor advisory portfolio. It’s a company that’s benefitting from Brazil’s new leadership, having booked two straight quarters of earnings growth after posting annual losses in each of the previous four years. And the stock has had a great year: it’s up 50% in 2018, with all of the gains coming since June, right around the time Chinese stocks started to plummet.
With Brazilian stocks one of the only national markets making gains in the emerging markets universe, I’m confident that this particular Brazilian ADR represents a good risk/reward setup.
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*Note: This post was excerpted from the October 18 issue of Cabot Emerging Markets Investor.