Go, Brasilia! That's JPMorgan's take on Brazilian stocks in 2021. The investment bank expects the country's leading stock gauge, the Ibovespa, to reach a lofty end-of-year high of 134,000 amid a continuing shift from tech names to cyclical plays in the financial and basic materials sectors as global economic activity recovers.
"We expect growth to pick up and the U.S. dollar to slightly weaken globally, providing room for value stocks to keep rallying," the firm's head of equity strategy, Emy Shayo, told Bloomberg in an interview late last year.
- Brazilian financial and basic material stocks sit well-positioned for the ongoing rotation into cyclical names as global growth slowly recovers.
- The iShares MSCI Brazil ETF (EWZ) share price pushed up toward the top trendline of a consolidation period, opening the door for an imminent breakout.
- The VanEck Vectors Brazil Small-Cap ETF (BRF) found support near the 50-day simple moving average (SMA) and a key horizontal trendline in a move that may lead to further buying in the weeks ahead.
The banking- and mining-heavy Ibovespa index trades just below 124,000 through Tuesday's close, offering an 8% premium for those who agree with JPMorgan's call. Traders can gain access to Brazilian stocks through these two country-themed exchange traded funds (ETFs). Below we take a closer look at each fund's metrics and use technical analysis to identify crucial chart levels worth watching.
The iShares MSCI Brazil ETF (EWZ)
Launched in 2000, the iShares MSCI Brazil ETF seeks a return similar to the MSCI Brazil 25/50 Index—a benchmark comprising large- and mid-capitalization companies trading on Brazil's B3 exchange. The fund provides a sizable bet on financials and basic materials, allocating 28% and 21% to those sectors, respectively. Iron-ore mining giant Vale S.A. (VALE) commands the largest single stock allocation at 16.5% in a basket of 57 holdings. Trading-wise, more than 25 million shares change hands daily on a razor-thin 0.03% average spread.
As of Jan. 13, 2021, EWZ has net assets of $6 billion, offers a 1.71% dividend yield, and is trading 31.05% higher over the past three months. The fund has added 2.7% since the start of the year.
The ETF's share price pushed up toward the top trendline of a period of six-week consolidation in Tuesday's session, opening the door for an imminent breakout. Furthermore, the 50-day SMA rose back above the 200-day SMA in late November to form a golden cross—a signal often marking the start of a new uptrend. Traders should look for a retest of the 2020 high at $48.48 while managing risk with a stop placed under the year-to-date (YTD) low at $35.77.
The VanEck Vectors Brazil Small-Cap ETF (BRF)
As its name suggests, the VanEck Vectors Brazil Small-Cap ETF provides exposure to Brazilian small-cap stocks by tracking the MVISA Brazil Small-Cap Index. The fund top weights financials, allocating around 25% of its portfolio to the sector, while industrials take up 17.59% of assets.
Basic materials also feature prominently with an allocation of around 10%. An average 13-cent spread, coupled with sporadic trading volumes, makes it worthwhile to use limit orders when placing trades. BRF holds $54.65 million in assets, issues a 1.65% yield, and has jumped 22.56% over the past three months as of Jan. 13, 2021. YTD, the fund has eased 0.80%.
The ETF filled many of its pandemic-induced sell-off March gaps as the price climbed higher during the first half of December. More recently, a pullback over the holiday period found support near the 50-day SMA and a key horizontal trendline in a move that may lead to further buying in the weeks ahead. Those who open a long position at these levels should set a take-profit order near $28, where the price may find resistance near the January 2020 high. Cut losses if the fund fails to hold above support at $19.
Chart resistance is the price at which an asset meets pressure on its way up by the emergence of a growing number of sellers who wish to sell at that price.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.