According to Barchart data, three ETFs hit 52-week lows in early Wednesday trading, compared to 249 hitting 52-week highs. If that doesn’t tell you something about the state of the markets nearing the halfway mark in 2024, I’m afraid nothing will.
Depending on who you believe, the markets are either really expensive or fairly valued due to the AI premium happening in 2024.
Charlie Bilello’s June 2024 post about the state of the markets says the S&P 500 had already hit an all-time 25 times in 2024 through June 6. That’s about five per month. Extrapolated over the entire year, the index could reach 60 all-time highs this year, the third-highest annual amount over the past 25 years.
This stat explains the gap between ETFs hitting 52-week highs compared to 52-week lows.
One of the three ETFs hitting a 52-week low early in Wednesday’s trading is the iShares MSCI Brazil ETF (EWZ). It hit its 16th 52-week low of the past 12 months. In 2024, its shares are down nearly 21% year-to-date, and 35% over the past five years.
Given its current trajectory, the Barchart Technical Indicator calls EWZ a Strong Sell.
Here’s why it’s time to buy.
Brazil’s Economy Strengthens in 2024
Brazil’s economy struggled in the second half of 2023. However, June 4 data from 2024’s first quarter suggests the country’s economy strengthened in the first three months of the year.
Statistics from the Brazilian government say the country’s GDP increased 0.8% from January through March, up from the revised Q4 2023 figure of -0.1%. Economists had expected 0.8% GDP growth in the quarter. However, the 2.5% year-on-year increase was 30 basis points above the economist’s 2.2% growth estimate. Labor markets are strong, with 3.25 percentage points of interest rate cuts since August 2023, leading to higher consumer spending and business investment.
The IPO Market in Brazil Is Ready to Rally
The IPO market has been relatively dormant in Latin America for several years. The last big IPO was Nu Holdings’ (NU) dual-listing on Brazil’s B3 stock exchange and the NYSE in December 2021. Brazil did 53 IPOs in 2021, raising $16.6 billion in those offerings.
Then interest rates spiked everywhere, including Brazil, with the country’s key rate moving 725 basis points higher in 2021 to 9.25%. There have been no IPOs since 2021 as investors opted for higher-interest-rate fixed-income investments.
However, the logjam could be ready to break.
“Approximately 100 companies are waiting for the right moment to go public at the stock exchange, and we expect the majority of them in the second half of this year,” Leonardo Resende, superintendent of corporate relations at B3, told Global Finance in March.
Importantly, as inflation continues to fall in Brazil, the government’s monetary stance will become less restrictive in 2024. That should continue to be good for Brazilian businesses.
In 2023, Brazil’s economy became the ninth-largest in the world, with a GDP of $2.13 trillion. The International Monetary Fund suggests that Brazil’s GDP could rise to $2.48 trillion by 2026, vaulting into eighth position worldwide.
This suggests that the Brazilian stock market, and by extension, the EWZ ETF, should be ready to rebound in the second half of 2024.
The Companies Held by EWZ
EWZ tracks the performance of the MSCI Brazil 25/50 Index, a collection of 49 large and mid-sized Brazilian companies.
The 25 part of 25/50 caps any single stock at 25% of the index, while the 50 refers to the maximum weight of 50% of the index that is allocated to stocks with a weighting of 5% or higher. For example, if six stocks each have a 10% weighting at the quarterly rebalance, each would be cut back to 8.33% to get back to 50% from 60%.
The average market cap of the 49 stocks in IWZ is $23.2 billion, with large caps accounting for 90% of the ETF’s $4.37 billion in net assets and mid-caps the remaining 10%. The average P/E, P/S, and P/CF for the fund are 7.14x, 0.91x, and 3.41x, respectively. That compares to 21.78x, 2.68x, and 14.52x for the SPDR S&P 500 ETF Trust (SPY).
The top three sectors by weight are financials (25.66%), energy (21.56%), and materials (16.71%). The top 10 holdings represent 57% of net assets, and nearly all 10 trade on the NYSE.
In terms of income, IWZ’s current yield is 7.7%, over 6x SPY. So, you’re getting paid handsomely to wait for Brazilian stocks to bounce back from its nearly 21% decline year-to-date.
If you’re an options fan, the ETF’s Sept. 30 $27 call looks like an attractive play. Its Vol/OI ratio as I write this is 239.00 with a $1.89 ask price. That’s a 7% down payment on the call. With a 0.56986 delta, you can double your money by selling the call before expiration if its share price increases $3.32 (12%) over the next 15 weeks.
Over the past 10 years, EWZ has generated an annual total return above 12% about half the time, so it’s doable.
If you’re an aggressive investor, EWZ looks like it’s bottoming out. The call allows you to find out for around $189 per contract. The risk/reward proposition is tilted your way.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
