Over the last few quarters, we have seen global stock markets experience extreme declines followed by big rallies. The S&P 500 fell 19.3% from the beginning of the fourth quarter through the low close in December and finished the quarter down 14%.
For comparison purposes, the Shanghai Composite fell 11.6% in the fourth quarter, and Mexico fell almost 19%. Eurozone stocks were down about the same as the S&P at 14% and India was up 3.5%.
The one market that stood out in the fourth quarter was Brazil. The iShares MSCI Brazil Capped ETF (NYSE: EWZ) was up 15% in the fourth quarter, and that was by far the best performance among G20 countries.
We see on the chart below how the ETF has been trending higher for the last seven months and the trend line that defines the upward trend.
To give you an idea of how well Brazil has performed over the last seven months, I put together this performance chart that compares the EWZ with similar ETFs from the U.S., the other BRIC countries (Russia, India, and China) as well as developed markets like the Eurozone, Japan, Canada, and Mexico.
Since September 1, the Brazil ETF is up almost 35% through March 11. The Russia ETF is the closest to it with a gain of 9.3%. The China ETF is the only other one in positive territory during this time period with a gain of 1.64%. All of the other ETFs are in negative territory since the beginning of September.
Since the low on Christmas Eve, the Brazil ETF is up 17.6% and that is less than the Canada ETF, the Spyders, and the China ETF. But it is still performing better than the other six.
So what is driving the rally in Brazilian stocks? The country did emerge from a recession in the first quarter of 2017, but the annualized GDP growth has been minimal at best. In the seven quarters since emerging from the recession, the growth rate has been between 0% and 0.5%. That isn’t exactly euphoria-inducing growth.
The country did elect a new president in February and Jair Bolsonaro is considered a pro-business politician, so that could be helping some. But that doesn’t explain the results Brazilian stocks saw in the fourth quarter.
Personally, I think the various trade disputes between the U.S., China, Mexico, and Canada have boosted Brazil. Brazil’s exports a great deal of soybeans and it is the second largest exporter behind the U.S. Soybean prices rose slightly in the fourth quarter, and that certainly helped.
Another major export of Brazil is iron ore. The country is second only to Australia in iron ore exports and Brazil exported over $19 billion worth of the commodity in 2017. With the steel industry being one of the various industries involved in the trade disputes, iron ore from Brazil became more attractive. We have also seen a huge jump in iron ore prices since the beginning of September. The spot price has jumped from $68.44 per dry metric ton (DMT) to $88.22 per DMT. That is a jump of almost 29%.
Please don’t take this article as me bashing President Trump and the trade wars. I have said all along that the uneven playing field in international trade needed to be addressed. The goal of this article was to point out how well Brazil’s market has been doing compared to the rest of the world. It also goes to show you how intertwined the various financial markets are. Our policies were meant to help our soybean producers and steel manufacturers in the long run, but in the short-term it made two of Brazil’s top exports more attractive to other countries.
This kind of reminds me of Sir Isaac Newton’s third law of motion– For every action, there is an equal and opposite reaction. Of course, there is also Newton’s first law of motion– a body in motion tends to stay in motion, unless acted on by a net external force.
Right now Brazil’s market is in motion to the upside and it looks like it will continue that way for the foreseeable future.