After sitting dormant for last year, Brazil's stock market is regaining its mojo as the South American economy emerges from lackluster growth and industrial output picks up better than expected.
Brazil's industrial output grew a seasonally adjusted 2.5% in January from December, eclipsing expectations of 1.6%, as government stimulus helped lift heavy truck production, Reuters reported . It raised hopes that manufacturing will rebound from a drop in output owing to week global demand, poor infrastructure and rising labor costs.
"Brazil's economy appears to be bottoming out after dismal performances in the last couple of years, growing at just 0.9% last year, down from 7.5% in 2010 and 2.7% in 2011," Neena Mishra, ETF research director at Zacks Investment Research in Chicago, said in an email. "Despite economic slowdown, job market and consumption has remained strong. Now with inflation creeping up, the central bank may be forced to raise rates much earlier than previously expected."
Brazil's inflation rate jumped from 6.15% year over year in January to 6.31% in February. The central bank will likely increase the key policy interest rate -- currently 7.25% -- by 0.25% at each of its meetings in April, May and July, Nick Chamie, global head of foreign exchange strategy and emerging markets research at RBC Capital Markets, wrote in research report Monday. For the week ending March 1, Brazil absorbed $1.4 billion in foreign exchange inflows and local stocks took in $293 million, Chamie wrote.
JP Morgan Securities upgraded Brazil stocks to "neutral" Tuesday on signs the government is becoming more business friendly and taking moves to control inflation, Business Recorder reported .
Top Brazil ETFs
Trading in the U.S. stock market , iShares MSCI Brazil Capped Index ( EWZ ), the flagship ETF tracking the emerging country, gained 2.36% year to date through Monday. That's while the benchmark iShares MSCI Emerging Markets ETF ( EEM ) shed 1.04% and the iShares MSCI EAFE Index ( EFA ) gained 4.75%. Last year, EWZ added merely 0.42%, severely lagging EEM's 19.1% return and EFA's 18.8% climb.
EWZ is trading just below a 57.79 buy point in a bullish first-stage, cup-with-handle base pattern. It has a rather weak IBD Relative Strength Rating of 38, indicating EWZ has lagged 62% of the stock market in the past 12 months. But its Accumulation/Distribution Rating has improved from E, the lowest possible, to B over the past four months, showing institutional investors went from heavily selling to buying shares. It trades above both its 50- and 200-day moving averages, confirming a strong uptrend. It has to gain 56% to reach its 2008 peak, so it could also be considered a "catch up" or mean reversion play in which stocks that have lagged the market start to outperform as they follow the market's lead in returning to former highs.
EWZ most-heavily weights financials at 28% of assets, materials 16%, consumer staples 15%, energy 14% and utilities 7%.
iShares MSCI Brazil Small-Cap ETF ( EWZS ) climbed 5.18% year to date after rallying 28.44% last year. It carries a IBD RS and Accumulation/Distribution Ratings combination of 59 and B-. EWZS offers more exposure to internal growth with a 35% weighting in consumer discretionary, 22% in industrials, 16% in financials, 10% in consumer staples and 7% in materials.
Market Vectors Brazil Small-Cap ETF ( BRF ) added 2.46% year to date after rising 18.8% in 2012. It sports an IBD RS of 49 and an A/D rating of A-. BRF most-heavily weights consumer discretionary at 39% of assets, industrials 19%, financials 13%, utilities 8% and health care 7%.
BRF and EWZS both broke out of bases in December. They're currently in buying ranges after finding support at the 50-day line following pullbacks from new highs. Both are also trading above their 50- and 200-day lines and therefore riding a strong uptrend.
Follow Trang Ho on Twitter @TrangHoETFs