Brazil's economy is facing a bleak outlook, plagued with increasing inflation, a plunging currency and contracting GDP. The Dow Jones Brazil Index has fallen almost 45 percent in the past year. But one trader says that all those negative factors are actually creating the perfect environment for a significant bounce.
"I think we're going to get another 10, possibly 20 percent bear market rally, of which since 2012 we've had four," Larry McDonald, head of U.S. strategy at Societe Generale, said Wednesday on CNBC's "Trading Nation."
According to McDonald, economic challenges will force Brazil's central bank to ease its monetary policy, which will prompt a relief rally for Brazilian stocks.
The Brazil central bank decided Wednesday to implement another rate hike, bringing the country's interest rates to a nine-year high. However, the central bank signaled that this would be the end of its tightening cycle.
"They're going to go into a more accommodating policy, which should be very good for Brazilian stocks," McDonald said.
In the past three years, McDonald said the iShares MSCI Brazil ETF (EWZ) has seen several rebounds between 20 and 40 percent, one of which was at the end of the last rate hike cycle.
The EWZ, which tracks Brazilian stocks, fell to 28 this week, hitting lows it hasn't seen since 2005. The ETF is down about 42 percent from a year rallied on Wednesday, gaining about 2 percent.
However, Boris Schlossberg of BK Asset Management said risk is still rampant in Brazil.
"I think Brazil is very serious trouble," Schlossberg said Wednesday. "The only reason to own EWZ is if there is a regime change, and that seems unlikely now."
Brazil's controversial President Dilma Rousseff is dealing with impeachment calls, low approval ratings and political scandal. Schlossberg said Brazil also faces trouble in commodities and declining market demand from China. Hosting the 2016 Olympics could be another huge fiscal hit to the country, he added.
And if Brazilian stocks rally, Schlossberg said this could be the time to re-establish new short positions.
Incidentally, McDonald agrees with that sentiment.
"Each bear market rally has failed, and we've gone back to retest the lows," McDonald said. "The risk reward right here for the next two months is very good, in terms of your upside vs your downside. But when you get the upside, history has proven, if you didn't sell any of those rallies, you lost money."
Kevin Kelly, chief investment officer at Recon Capital Partners, said that although the Brazilian market could see a bounce off session lows, it's unlikely a relief rally will happen by year end.
"The economic numbers coming out of China are not conducive to Brazil," he said. "If China gets a cough, Brazil gets a cold."
Kelly said investors should wait to see a rise in commodities prices and China's Manufacturing PMI, before adding any exposure to the emerging market. Bubbling political turmoil and the possibility of overturning leadership are also factors to watch, he added.
"Brazil is probably one of the best bets in Latin America, but it's just so uncertain," Kelly said. "They're already heading toward one of the worst recessions in 25 years."
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