After Huge Rally, Here’s How We’re Trading Brazilian Stocks
Brazil stocks jumped after election results were tallied.
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Brazil is home to the largest stock market in Latin America. Boosted by an election held this past weekend, Brazilian stocks are gaining traction.
Earlier this year, we disclosed our long position in the iShares MSCI Brazil ETF (EWZ). EWZ contains familiar Brazilian names like Petrobras (PBR) and Vale SA (VALE). The position sat quietly for most of the year.
Then came this past weekend’s Brazilian elections. Incumbent President Lula (45.16%) was beaten by challenger Flavio Bolsonaro (47.03%). The result isn’t final, and will be determined by a runoff election on October 25.
Bolsonaro is favored to win that runoff, because it eliminates three candidates that received about 7.25% of the combined vote. The political platforms of all three candidates are considered closer to Bolsonaro than Lula, so eliminating them from the competition favors Bolsonaro.
Markets Approve
I don’t know much about Brazilian politics, but I know the market likes this result. Our EWZ position shot higher by 12% on Monday, to reach a six-year high. EWZ has now gained 20% over the past week, and is up 34% year-to-date.
The move occurred on the ETF’s highest volume this year, an indication that this rally could have staying power (arrow).
Some of Brazil’s most popular individual names participated in the rally. ADRs for Petrobras Brasieiro SA jumped 13%. Petrobras closed at its highest level in 14 years.
Chasing Not Recommended
Despite this positive development for Brazilian stocks, I wouldn’t chase EWZ at this level. If you decide to step in, I recommend a cautious approach. Here’s why:
- Bolsonaro’s platform promises fiscal austerity, caps on spending, and deregulation. Those promises might be hard to keep. If kept, they could have a negative impact on Brazilian stocks.
- As a result of Monday’s rally, there is a massive gap in EWZ’s chart from $38.22 to $42.74. If the price fills that gap, longs will regret buying the ETF up here.
At the same time, we must recognize one of the more attractive aspects of Brazilian investments. While emerging markets trade with a forward price-earnings ratio of about 12x, the Brazilian markets trade with a forward P/E of about 9x.
So, while we’re not chasing to add more shares at current prices, we’re not selling our current shares either.
No Such Luck With Mexico’s EWW
Regarding our position in the iShares MSCI Mexico ETF (EWW), we closed it for a small loss when the ETF traded below both its 50-day (blue) and 200-day (red) moving averages.
As a general rule of thumb, we want to partially exit or entirely close positions that fall from a 52-week high to beneath its 50-day and 200-day MAs.
At the time of publication, Ponsi was long EWZ.
