As Business News America reported yesterday, Moody's Investor Services are looking at an upgrade of Brazil's investment grade, which would be good news for the economy as a whole, the financial sector in particular and, more interestingly, for retail investors.
iShares MSCI Brazil Index: EWZ
Moody's sovereign ratings team put Brazil's government debt rating on review for a possible upgrade in July. In late August, the country's finance minister Guido Mantega said that the announcement that Moody's would join Fitch and S&P in giving Brazil an investment grade should come in September.
The finance sector in particular is set to benefit from any upgrade, as they have suffered from the country ceiling on foreign currency debt & deposit ratings. As soon as the country rating is adjusted, the major banks will automatically climb the ratings ladder.
Timing is crucial here, as Banco do Brasil and the local affiliate of Bank Santander (STD) are both looking to launch IPOs in the fourth quarter, alongside potential ADR listings on the New York Stock Exchange.
The Wall St Journal reported on Friday, that many foreign investment funds have been buying up stock in Blue Chip companies since early this month, as evidenced by the chart below.
"We heard Mantega speculating on this earlier in the month, and at that time we had net outflows," said Pedro Galdi, an investment analyst at Sao Paulo-based SLW Corretora. "But now the money is coming back in and I'm thinking one of the reasons why Brazilian stocks haven't seen any significant profit-taking is because investors are expecting a change from Moody's."
Any upgrade of Brazil should also see retail investors that have been sitting on the sidelines re-enter the market, buying ADRs of some of the more popular stocks, such as Petrobras (PBR), Vale (RIO) and SQM, this has obvious benefit to the iShares MSCI Brazil Index Fund.
EWZ has had a great run this year and my expectation is that this will carry on for the rest of this year on buoyant investor sentiment. The Finviz chart shows that EWZ is following a fairly defined upward trendline. Looking at the ETF on a shorter term view, with bullish sentiment in the retail investment market, I expect to see it breaking $70 in the next 10 days' trading, with the potential to breach $86 by year's end.
