By Gabriel Araujo
SAO PAULO (Reuters) - Global X, one of the world's top exchange-traded funds (ETF) providers, is optimistic about Brazil's prospects as Latin America's largest economy drives a monetary easing cycle and sees its economic growth overshoot forecasts.
The company, which manages some $48 billion worldwide, dubs the country one of the most attractive cyclical opportunities in emerging markets at the moment, and says it has been catching more attention from international investors.
"There are a lot of good things going on. Brazil's checking a lot of boxes right now," Global X's Head of Emerging Markets, Malcolm Dorson, told Reuters on Monday.
He cited strong momentum and still discounted equity valuation - even after a recent rally - as factors behind the call by Global X, whose funds include the actively managed Brazil Active ETF.
Brazil's central bank, meanwhile, started an interest rate-cutting cycle in August after holding borrowing costs at 13.75% for nearly a year to tame high inflation.
It has so far reduced rates by a total 200 basis points but already flagged two more 50-basis-point cuts ahead, a pace Dorson sees as good as inflation hovers around 4.5%.
"You still have significant amount of room to go while maintaining positive real rates," he said. "I think as long as they stay on the steady path, they can continue helping the economy."
Longer duration and consumer plays tend to benefit from the environment marked by falling interest rates and low unemployment, Dorson said, naming local banks and companies such as Localiza, Vamos and Rumo among potential outperformers.
POSITIVE SURPRISES
Brazil's economic growth beat expectations in 2023 and is likely to have reached 3% in the period, the central bank estimates, well above the 0.8% forecast by economists polled by the bank at the beginning of last year.
Many worried that leftist President Luiz Inacio Lula da Silva's policies would not be investor-friendly, but in his first year in office markets were surprised by the effectiveness of Finance Minister Fernando Haddad, Dorson said.
Haddad helped persuade Congress to pass a new fiscal framework and a tax reform, and has backed efforts to erase the country's fiscal deficit this year.
At the same time, Dorson noted, checks and balances were in place as Brazil's conservative-leaning Congress prevented Lula from doing "anything very radical" but did not refrain from passing government-backed measures to increase revenues.
Brazil moving back towards investment grade within the next few years, Global X believes, is not out of question. All three rating majors currently place the country two notches below that level.
"This is a big goal, but I don't think it's too far away," Dorson said. "As long as they stay on the course that they've set out, potentially by the end of Lula's mandate we could get back to investment grade. And that is massive."