No matter which valuation level you look at, Brazil still isn’t cheap. The median price to cash flow level for the MSCI Brazil Index is still 8.58x. This is nearly 3x the trough level during the financial crisis. The median price to earnings ratio has fallen much more than price to cash flow, but it to remains well above 2008 lows. It currently stands at 13.84x which is only slightly below the average level since 2007. Where valuations are starting to look intriguing at least is when we look at median price to sales and median price to book ratios. The median prices to sales has dropped to just 1.11x which is the lowest level since 2009. The median price to book is at 1.59x which is on the low end of the last couple of years but still higher than in 2012 and 2008-2009. Overall, valuation levels still aren’t at levels to make it worthwhile for investors to take the plunge.
Given the economic backdrop, the outlook for Brazilian stocks remains surprisingly optimistic as analysts’ earnings expectations still seem out of step with the current situation. Over the past decade, Brazilian stocks have increased EPS by 12% annually. Currently, consensus EPS estimates for this year are very negative at -25.8%. However, analysts expect Brazil to be able to make up for this growth in the following three years by averaging a robust 20.3% growth rate from FY2-FY4. This seems like an incredibly high hurdle for Brazil to leap over even as these growth expectations start from a depressed level after this year.
Finally, from a relative technical perspective the iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ) remains firmly in a down trend relative to the MSCI All-Country Index. This ETF looks like it is years away from forming a base relative to the global equity market let alone beginning to outperform. It recently broke down to a new four-year relative low.
All in all, given the poor economic picture, valuation levels that aren’t a screaming buy, optimistic analyst expectations for the future, and a very negative technical set-up, investors should be better off allocating their scarce investment capital to more productive equity markets around the globe.
This article was written by Eric Bush, CFA and was originally published here.