Latin American equities are getting absolutely hammered this morning, with the iShares Latin America 40 ETF (ILF) falling sharply alongside the Brazil-focused EWZ following Luiz Inácio Lula da Silva’s surprise reelection victory.
Investors are worried about continued government spending, fiscal deterioration and pressure on the Brazilian real. With Brazil accounting for roughly 55% of ILF’s holdings, the fund is getting dragged down by a selloff that is primarily political in nature.
It’s worth remembering why Brazilian equities had been doing so well in the first place. EWZ had gained roughly 14% in October heading into Friday’s close, largely on expectations that Flávio Bolsonaro would win the election and pursue a more market-friendly fiscal agenda.
But the rally was also supported by foreign investment, attractive valuations, Brazil’s commodity exposure and the prospect of lower interest rates. In other words, investors weren’t just buying an election outcome. They were also buying a market that, even after a substantial rally, remained inexpensive relative to U.S. equities, which is one of the reasons I’ve liked the iShares Latin America 40 ETF (ILF) and emerging market ETFs like EEM.
The question now is with the ILF down -almost 15% and the EWZ down more than -25%, is this morning’s selloff an opportunity?
I’ll try to lay out the quick pros and cons so you can decide…