Brazil's ADR Index Spikes Again After Hitting Triple Digits In 2016 1
Sao Paulo skyline at night, Brazil

The MSCI Brazil Index shows Brazilian stocks are still golden

The MSCI Brazil Index edged out the Poland Index to take the top spot as the best emerging market in January in terms of equity returns. If we look at the MSCI Brazil ADR Index, which invests in American Depository Receipts of Brazilian companies, that index has posted 14% returns for the month.

Given the stellar performance by Brazilian equities (EWZ) (DBBR), and the fact that they comprise 57.9% of the MSCI Emerging Markets Latin America Index, it is no wonder that the regional index easily outperformed its peers in January.

The past one year has been excellent for the Brazil Index due to its unsurpassed 92.8% returns. The ADR Index, in the same period has rocketed 104%. However, over a five-year period, the Brazil Index is among the five worst performers while the ADR Index is the second worst performer; the latter is among the top ten worst performing country indices over a 10-year period.

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The dream run continues

If one were to solely look at macroeconomic and geopolitical factors, one would not be able to reconcile the performance of Brazilian equities with the prevailing conditions. A country which has been in recession for two successive years in 2015 and 2016 and is barely expected to grow, had been suffering from high levels of inflation, was plagues by corruption scandals and underwent the impeachment of its first woman President last year cannot be expected to be doing well in terms of asset prices.

And yet, Brazil continues to prove fundamentals wrong. This is not to say there is no solid reason for the rise in Brazilian stocks. Commodity prices have been rising, which has benefitted the commodity-exporter.

Further, it has not been impacted as much by the trade protectionism rhetoric of the new US administration as a country like Mexico has because it has a more diverse basket of trade partners. Its biggest trading partner is China and an improvement in sentiment regarding the Asian nation has been beneficial to Brazil as well.

Factors to watch out for

The fiscal austerity being put in place by the Michel Temer government is required for the improvement of government finances. The international investment community has taken not and continues to shop for Brazilian equities viewing that constitutional amendments like PEC 55 will help the country in the long-term.

But at the same time, the Brazilian people, already facing poverty, are unhappy with the government because of fiscal austerity. The government will have to ensure that while trying to please investors, it also ensures that the backlash at home remains contained, which will otherwise be quite detrimental to investor sentiment.

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