Is Brazil’s Market Crash An Overreaction?
Submitted by QTR's Fringe Finance
Latin American equities are getting absolutely hammered this morning, with the iShares Latin America 40 ETF (ILF) falling sharply alongside the Brazil-focused EWZ following Luiz Inácio Lula da Silva’s surprise reelection victory.
Investors are worried about continued government spending, fiscal deterioration and pressure on the Brazilian real. With Brazil accounting for roughly 55% of ILF’s holdings, the fund is getting dragged down by a selloff that is primarily political in nature.
It’s worth remembering why Brazilian equities had been doing so well in the first place. EWZ had gained roughly 14% in October heading into Friday’s close, largely on expectations that Flávio Bolsonaro would win the election and pursue a more market-friendly fiscal agenda.
But the rally was also supported by foreign investment, attractive valuations, Brazil’s commodity exposure and the prospect of lower interest rates. In other words, investors weren’t just buying an election outcome. They were also buying a market that, even after a substantial rally, remained inexpensive relative to U.S. equities, which is one of the reasons I’ve liked the iShares Latin America 40 ETF (ILF) and emerging market ETFs like EEM.
The question now is with the ILF down -almost 15% and the EWZ down more than -25%, is this morning’s selloff an opportunity?
I’ll try to lay out the quick pros and cons so you can decide…
Brazil’s presidential election went down to the wire Sunday night, with incumbent Luiz Inácio Lula da Silva defeating Flávio Bolsonaro, son of former President Jair Bolsonaro, by roughly 51.8% to 48.2%.
Bolsonaro, who had won the first round by more than 2.2 million votes, initially led Sunday’s count before Lula surged ahead as returns arrived from his northeastern strongholds. The controversy began just before polls closed, when Supreme Court Justice Cristiano Zanin ordered voting extended nationwide by two hours amid transportation disruptions and severe weather.
Bolsonaro refused to concede and announced plans to seek annulment of the results, although the legal prospects remain uncertain...(READ THIS FULL ARTICLE HERE).