Brazil’s central bank went against the grain by announcing its first interest rate hike in two years in September 2024 on concerns that the more robust than anticipated levels of economic activity might stoke inflationary pressures. The door was left open to further increases.

Higher rates are not always taken positively by equity markets and the MSCI Brazil index has taken a step back since rates were increased. However, on a three-year view the index has outperformed MSCI Emerging Markets benchmark with an annualised total return of 7.3% versus 0.4%  for the broader benchmark.

In part this has been thanks to its exposure to commodity markets. More than 30% of the index is accounted for by resources stocks – this compares with a smidge above 10% for MSCI Emerging Markets. Financials also have a significant weighting in the index at 36.9%. Among the largest stocks in the index is Itau Unibanco (ITUB:BVMF) which is the largest banking institution in Latin America.

Despite their recent outperformance of other emerging markets, Brazilian shares are less expensive. MSCI Brazil’s constituents have an average dividend yield of 6.2% and forecast price to earnings ratio of 8.2 times versus the 2.5% and 12.4 times averages for MSCI Emerging Markets.

This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit www.temit.co.uk

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