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Brazil: Twists in the Election Open Opportunities

Brazil: Twists in the Election Open Opportunities

Posted by Laura Zúñiga on September 16, 2014

After the elections-induced sell-off last week, Brazilian stocks, along with related exchange traded funds, are beginning to look more attractively priced.

The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) was up 1.2% Monday after declining a little over 10% last week. EWZ is still up 9.1% year-to-date. [Election Bounce for Brazil ETFs]

Brazilian equities plunged on the result of the latest voter poll that revealed current president Dilma Rousseff was gaining ground, potentially providing investors with a buying opportunity now.

“We look through these events and near-term electoral noise, and stick with our premise that presidential candidate Marina Silva has a better than 50% chance of winning the elections, so this looks like a buying opportunity for us,” Brown Brothers Harriman said in a note, reports Dimitra DeFolis for Barron’s.

Brazil’s stocks are trading around 11 times estimated earnings for the next 12 months, compared to about 15 times for Chile and 18 times for Mexico.

The Brazilian market has weakened each time polling showed Rousseff gaining favor. Many see presidential candidate Silva as a reform-minded, pro-market leader that will reduce government interference in the economy. Specifically, Silva wants to provide greater autonomy for the central bank – Alexandre Tombini, the president of the central bank, is considered a government minister and reports to president Rousseff.

The real currency was flat Monday, trading around 2.3401 per U.S. dollar. The WisdomTree Brazilian Real ETF (NYSEArca: BZF) was up 0.1%. [Brazil’s Election: Peril or Profit for EM Bond ETFs]

“We doubt the U.S. dollar/Brazilian real will stay above the 2.35 for long – if it even reaches that point – and we certainly expect the central bank to push back hard against any pre-electoral foreign-exchange volatility,” Brown Brothers Harriman added. “The government will not tolerate a 2.40 level.”

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