This is not 2009, the year in which the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) surged 122%, but after a two-year stretch in which many Brazilian assets disappointed global investors, bonds and equities in Latin America’s largest economy are gaining more supporters.
EWZ gained 1.2% on above average volume Tuesday, a day after Standard & Poor’s lowered Brazil’s sovereign debt rating to BBB-, the lowest investment grade. Several market observers viewed Tuesday as test for Brazilian assets following the S&P downgraded and, for now, it looks as though the test was passed. [Brazil ETFs Survive S&P Downgrade]
In addition to equities, some investors see opportunity with Brazilian bonds. Pimco, the world’s largest bond manager, views valuations on Brazilian debt as attractive for investors with long-term time horizons, Reuters reported.
S&P did raise its outlook on Brazilian debt to stable from negative, which implies further downgrades from the ratings agency are unlikely in the near-term. However, the S&P downgrade could prompt other ratings agencies to follow suit. In October 2013, Moody’s Investors Service pared its outlook on Brazilian sovereign bonds to stable from positive while affirming the credit rating of Latin America’s largest economy at Baa2. [Brazil Bonds Vulnerable After Moody’s Changes]
A spate of interest rate increases by Brazil’s central bank has taken the benchmark selic rate to among highest interest rates in the emerging world previously punished Brazilian bonds, but investors have warmed to the country’s debt markets. Investors poured a net $5.87 billion into Brazil’s local debt markets in the first two months of this year, the largest inflow for the asset class since January 1995, Reuters reported.
Despite ample talk about weakness in emerging markets currencies, including the Brazilian real, some ETFs holding local currency debt have not been too bad this year. The actively managed WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) and the passively managed Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC), both of which allocate about 10% of their weights to Brazilian bonds, are essentially flat on the year. [Brazil ETFs OK After S&P Downgrade]