2023-06-20 17:51:24 ET
Summary
- Brazilian stocks sport high relative strength compared to other emerging markets over the last year.
- With a low earnings multiple, strong technical momentum, and bullish seasonal trends at play, most signs point to further upside ahead in EWZ.
- The ETF has recently broken out from a near-term downtrend, with a bullish golden cross indicating a new uptrend is underway.
- I highlight key price levels to watch on this high-yield country fund.
Emerging markets have been a sore spot for global investors for years on end. In the last 12 months, it has been the same old story. The global 1-year ETF performance heat map shows about flat returns among the major EM funds while most other parts of the international stock market are positive.
Among the better spots is Brazil. The iShares MSCI Brazil ETF (EWZ) sports a 15% total return, just shy of the S&P 500’s 19% advance. I see more upside ahead for the world’s 12th-largest economy and have a buy rating on EWZ.
1-Year ETF Performance Heat Map: Brazil Better Than Other EMs
According to the issuer , the ETF seeks to track the investment results of an index composed of Brazilian equities, offering investors exposure to large and mid-sized companies in Brazil. EWZ is a large fund with net assets of more than $5 billion as of June 16, 2023. Tradeability is also strong with the fund as its 30-day average volume is nearly 30 million shares while the 30-day median bid/ask spread is narrow at just 3 basis points. EWZ is known for its high distribution rate . The trailing 12-month yield is better than 8% and dividends are paid semi-annually. It is not particularly cheap for a large country fund – the annual net expense ratio is 0.58%, per iShares.
Digging into the portfolio, there are 48 total equity positions and volatility is high. The 3-year average volatility is more than 32%, well above the standard deviation of S&P 500 returns over that stretch. Value investors may like EWZ – its P/E ratio is less than 7, according to Morningstar while iShares lists the earnings multiple as just 5.1 currently.
EWZ is very much a large-cap fund with more than 90% of net assets in the upper third of the Style Box. The allocation is also oriented to the value style whereas growth is just 16% of the fund. With a high yield factor and low momentum, liquidity is robust and the quality of companies EWZ holds is on the high side. You will see later that technical momentum is quite favorable, however. But investors should be aware that the ETF is concentrated – 56% of assets are in the top 10 holdings with Vale S.A. (VALE) being more than 13% of the allocation.
EWZ: Portfolio & Factor Profiles
The sector breakdown is also key for investors to interpret properly. The Financials, Materials, Energy, and Industrials areas are all risk-on, cyclical spots. There is relatively little growth exposure while defensives are notable with decent weights in both Utilities and Consumer Staples.
EWZ: Heavy In Value & Cyclical Sectors
Seasonally, most of EWZ's annual gains come during the second half, according to data from Equity Clock . Thus, right now could be an ideal time to get long this emerging market.
EWZ: Bullish Seasonal Trends Setting Up
The Technical Take
EWZ has been quite choppy over the last 3 years. Notice in the chart below that the ETF has ranged between $25 and $42 with little in the way of an established trend over that period. Recently, however, it has broken out from a near-term downtrend. After hitting a peak near $40 in April last year, under the mid-2021 multi-year peak, a series of lower highs had been put in while the mid-$20s continued to hold as support. June was a boon for the bulls, though. I spotted an upside breakaway gap near $30 from just a few weeks ago, and momentum has picked up since then.
The rally to near $33 has taken EWZ to its best level since November 2022. With a bullish golden cross just now taking place (a technical development in which the shorter-term 50-day moving average crosses above the longer-term 200-day moving average), there are growing signals that a new uptrend is underway. What’s more, take a look at the RSI reading at the top of the chart – it's in a bullish range and has not backed away from ‘overbought’ conditions. I see next resistance in the $35 to $36 area.
EWZ: Bullish Golden Cross, Uptrend Breakout, Eyeing $35
The Bottom Line
I have a buy rating on EWZ. The low earnings multiple has finally been paired with much-improved technical momentum .
For further details see:
Brazil Breaks Out: Spotting A New EWZ Uptrend