Brazil Looks To Keep The Good Times Rolling (EWZ)

Image of Brazil flag flying

From Invesco: On the back of a broad pickup in Latin American economic activity, real gross domestic product (GDP) growth is expected to accelerate this year.1

However, continued political uncertainty and critical elections in Mexico and Brazil could weigh on the region. With market exposure in both countries, what are the key areas the Invesco International Growth Fund team will be watching in 2018?

Brazil: Earnings expectations are on the rise, but political doubts linger

Despite a year of political turmoil and delayed reform, Brazil’s fundamentals showed signs of strength in 2017. As we turn our attention to 2018, Brazil’s economic outlook is steadily being revised upward, with economic activity supported by a tailwind from stronger commodity prices and nearly 300 basis points of monetary easing in the second half of 2017.1

The country’s GDP is expected to accelerate from 1% in 2017 to 2.5% in 2018, and we continue to see scope for additional monetary easing, with the Selic rate (the Brazilian Central Bank’s overnight interest rate) at 7% and inflation below 3.5%.With this in mind, Brazil’s earnings expectations have been revised up by 2% in the past three months.

From the standpoint of our team’s Earnings, Quality and Valuation (EQV) process, Brazil has been our largest destination for capital, with three new holdings initiated in 2017, and it remains the largest country overweight for the fund in the region.3

Perhaps the biggest uncertainty centers on October’s pivotal presidential election. The front-runner is former populist President Luiz Inácio Lula da Silva (commonly referred to as Lula). If he wins, there is concern he may roll back the structural reforms that have begun. Lula is currently in a unique position. On Jan. 24, the court of appeals upheld his corruption conviction. Lula can still appeal to a higher court, but his outcome will certainly affect Brazil’s earnings outlook for the remainder of 2018 and beyond, and we’ll continue to monitor economic volatility in the months to come.

Mexico: Slowing domestic activity amid low prospects for easing

Mexico’s exports have benefited from US strength; however, domestic activity has been decelerating. The consensus expectation is that Mexico’s economic growth will be stable in the low 2% range.4

While consumer spending power is under pressure (with inflation running above 6%), Mexico’s monetary policy remains tight, and prospects for easing seem low.Corporate capital expenditure and foreign direct investment are running below trend due to high uncertainty around NAFTA and the upcoming presidential election.Leftist candidate Andres Manuel Lopez Obrador (commonly known as AMLO) is currently leading in the polls; his election could further heighten tensions between Mexico and the US.

Our bottom-up analysis saw us scale back exposure to Mexico during the fourth quarter of 2017, including a complete liquidation of Grupo Televisa.6 As 2018 progresses, we’ll continue to assess our holdings in the region.

Read more blogs from the Invesco International and Global Growth team.

Learn more about Invesco International Growth Fund.

1 Source: Morgan Stanley Big Debates 2018 – Latin America, Dec. 19, 2017

2 Source: Banco Central do Brazil, via Bloomberg L.P., Jan. 5, 2018

3 As of Dec. 31, 2017, Invesco International Growth Fund’s allocation to Brazil was 6.22% versus the MSCI AC World ex-US Growth Index at 1.60%.

4 Source: Central Bank of Mexico, via Bloomberg L.P., Jan. 5, 2018

5 Source: Morgan Stanley, “2018 Latin America Equity Outlook”, Nov. 27, 2017

6 As of Dec. 31, 2017, Grupo Televisa comprised 0.00% of Invesco International Growth Fund.

Important information

A basis point is one hundredth of a percentage point.

Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.

The MSCI All Country World ex-US Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the US.

Holdings listed are for informational purposes only, are not buy or sell recommendations and are subject to change.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.

Invesco International Growth Fund risks:

Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the fund.

The iShares MSCI Brazil Index ETF (EWZ) was unchanged in premarket trading Wednesday. Year-to-date, EWZ has gained 14.49%, versus a 5.58% rise in the benchmark S&P 500 index during the same period.

EWZ currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 21 ETFs in the Latin America ETFs category.

This article is brought to you courtesy of Invesco.