- With the country's terms of trade soaring amid the ongoing rise in iron ore and soybean prices, the real looks set to join in the global FX rally.
- EWZ returns are typically primarily driven by the real, which tends to be much more volatile than local stocks, suggesting a recovery could send the ETF considerably higher.
- Local stocks also trade at a discount to EM averages on almost every metric, with the MSCI Brazil's forward EV/EBITDA ratio trading at just over half of the MSCI EM.
- At these levels, we would expect continued currency weakness support stocks in local currency terms as the commodity price boom leads to windfall export receipts in BRL.
- However, if we are correct about an impending real rally, then we could be in for major gains in the EWZ.
For further details see:
EWZ: Currency Gains Suggest Further Upside