I recommend buying the Franklin FTSE Brazil ETF (NYSEARCA:FLBR). Brazil has been facing a bad moment in the stock market, especially due to discussions between the president of the republic and the president of the central bank. But it is worth remembering that the 2023 rally was marked by several speeches of the same type by Lula.

Furthermore, there are good signs that the new president of the Central Bank appointed by Lula will make technical rather than political decisions during his term. Brazilian shares are at their cheapest levels in recent years, and this could be a great opportunity.

Introduction

Brazil is one of the most strategic emerging countries in the world, with its wealth in minerals, energy and agricultural competitiveness. However, this does not match the stock market's worst return performance of the year among its peers.

There is a great deal of political noise led by the Brazilian president against the current president of the Central Bank, Roberto Campos Neto. Lula has made successive attacks on Campos Neto, stating that he is mainly responsible for the poor performance of the Brazilian economy by keeping interest rates at such a high level as they are now.

In this report, I will describe that these discussions are not just taking place this year but have already occurred in other years. Furthermore, I have good evidence to believe that the next president of the Central Bank (appointed by Lula) will have the autonomy to conduct monetary policy in a pragmatic manner.

But before discussing these ideals, I will explain a little more about the composition of this ETF.

Franklin FTSE Brazil ETF

The ETF is weighted by market capitalization of large and mid-cap Brazilian stocks. Larger holdings are limited to 25% of the total fund value. Below are the ETF's main holdings.

This ETF excludes small-cap stocks, unlike other MSCI-based competitors, such as EWZS (NYSE:EWZS) itself. Finally, let's get into the investment thesis that supports my buy recommendation for the FLBR ETF.

Lula - A Populist

The president of Brazil, Lula, is from the Workers' Party, and his interventionist speeches undoubtedly increase the risk of investments in the country. However, it is good to remember that Brazil had a good 2023 for the stock market, and the year 2023 was also marked by several interventionist speeches by Lula

In my opinion, investors should not pay so much attention to the speeches of the president of Brazil, who seeks to intervene in the Central Bank. It is worth highlighting that Brazil's Central Bank became independent during the Government of Jair Bolsonaro.

As a result, the mandate of the President of the Central Bank no longer coincides with the mandate of the President of the Republic, and here is the second pillar of my thesis.

Will The New President Of The Central Bank Be Able To Obey Lula?

Lula severely attacked the president of the Central Bank and was appointed by Jair Bolsonaro, Roberto Campos Neto for interrupting the cycle of interest rate cuts, as inflation expectations are unmoored and the cycle of interest rate cuts has not yet begun in the USA.

However, a good signal was given at the interest rate decision meeting. The most likely candidate to be nominated by Lula for the presidency of the Central Bank is Gabriel Galípolo, however, he voted together with the current president of the Central Bank, Roberto Campos Neto, to interrupt the interest rate cut.

There is a clear signal to investors that, if Lula appoints Gabriel Galípolo to the Central Bank, there is a great chance that monetary policy decisions will continue to be technical, and not in obedience to the wishes of the President of the Republic.

Brazilian Assets Are Very Cheap

Finally, I will bring new data in line with my initial coverage thesis for EWZ (NYSE:EWZ) and EWZS. Brazilian assets are very cheap:

In the graph above, we see a comparison of Brazil and other emerging markets. Brazil has a good correlation with the SPX; however, it has one of the worst performances in its stock market. However, the table below intrigued me even more.

In the table above, we see again that Brazil has one of the cheapest valuations and a good ROE for its companies; however, it has one of the worst returns among emerging markets. All this data corroborates my thesis about buying the FLBR ETF. Let's now look at the Quant Rating and Factor Grades tools.

FLBR According To Quant Rating And Factor Grades

As we can see, due to the terrible momentum and high risks, Quant Rating recommends a strong sale of the FLBR ETF:

In fact, Brazil, like other emerging markets, has a much greater risk than investing in the American economy, for example. Now, I will describe one more risk to the thesis, as investors must be well aware of the risks of their investment theses.

Potential Threats To The Bullish Thesis

In my view, the big risk for the investment thesis in the FLBR ETF or in any other asset is the Brazilian President entering into a fierce dispute against the market following his appointment to the Presidency of the Central Bank.

It is worth noting that the main candidate, Gabriel Galípolo, is an executive already known in the Brazilian financial market. Gabriel already had an established career as an executive and apparently has a more nationalist vision.

However, there are rumors that after the vote to interrupt the interest rate cut, Lula may have gotten angry with Gabriel, and was considering nominating other names for the Central Bank, such as Guido Mantega and Aloízio Mercadante.

It is worth noting that Guido Mantega was the Minister of Finance in the Government of Dilma Rousseff, who was impeached after his Government plunged Brazil into one of the worst recessions in history. Aloízio Mercadante has an extensive political history, including being responsible for cases of corruption in the Operation Car Wash.

The risks to investment are diverse, and investors should be careful and examine them very well before making their investment.

The Bottom Line

Brazil is a country with great competitive advantages, especially in agriculture. Its Independent Central Bank and inflation under control also stand out.

These attributes do not match the worst stock market performance among its emerging peers. Furthermore, as I was able to show in this report, many of the risks highlighted are controversial and seem more like investment opportunities.

Based on this analysis, I recommend buying the FLBR ETF. In my view, investors should focus on the competitive potential and solidity of Brazilian institutions. In my opinion, the risk-return ratio is very attractive.