Scour Friday’s headlines pertaining to emerging markets economies and stocks and there is an excellent chance more bad news than good will be found.
Brazil, Latin America’s largest economy, made its share of contributions to the end-of-week emerging markets carnage. Already grappling with the effects of slumping commodities demand and a weak real, the country said its current account deficit grew to $8.7 billion last month from $5.1 billion in November. Economists expected a deficit of $6.8 billion and foreign direct investment plunged to $6.5 billion from $8.3 billion, Matthew Malinowski reported for Bloomberg.
That news was revealed on the same day that Petrobras (NYSE: PBR), Brazil’s state-run oil company, cascaded to its lowest closing price since June 2005. At Friday’s close around $11.75, Petrobras closed more than $6 below its 2008 low.
As we noted earlier this week, Petrobras is weighing on the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), which makes sense since the stock is EWZ’s largest holding. To be fair, Petrobras is not the only Brazilian stock hampering EWZ. Iron ore giant Vale (NYSE: VALE) lost almost 2% Friday. Steelmaker Companhia Siderúrgica Nacional (NYSE: SID), a smaller EWZ holding, lost almost 4%. [Petrobras Plaguing Brazil ETF]
Those negative catalysts sent EWZ to 3% loss on the day. Earlier Friday, the ETF touched a new 52-week low and in a sign that sellers mean business in the largest Brazil ETF, volume was nearly 39% above the daily average. [Down and Out in Rio]
EWZ closed slightly below $40, which could prove ominous because that price has previously stood as critical support for the ETF. EWZ flirted with $40 in late August before surging to over $50 in mid-October.
Unfortunately for Brazil ETF bulls, if there are any left, EWZ is far from the lone Brazil ETF offender. Thirty-eight ETFs hit new 52-week lows Friday and eight were Brazil funds. That group of eight does not include multi-country funds with significant Brazil exposure, such as the iShares Latin American 40 ETF (NYSEArca: ILF).
In the case of some Brazil ETFs, Friday’s closes were not just 52-week, but mult-year lows. The Market Vectors Brazil Small-Cap ETF (NYSEArca: BRF) closed at its lowest point in four and a half years while the rival iShares MSCI Brazil Small-Cap ETF (NYSEArca: EWZS) hit an all-time low. Same goes for the EGShares Brazil Infrastructure Index Fund (NYSEArca: BRXX).
Brazilian bonds are no more attractive than stocks. Standard & Poor’s ratings firm has expressed concern over Brazil’s worsening fiscal accounts and may even downgrade the country’s BBB credit rating. Both S&P and Moody’s Investors Services have lowered their outlook on Brazil’s sovereign rating. [Brazil Credit Rating in Danger]
There are glimmers of hope for the patient, though that does not mean Brazil ETFs need to be immediately purchased.
“But with the volatility currently being experienced by emerging markets as the Federal Reserve tapers, and ahead of October Brazilian presidential elections, the scaling of Brazil investments among non-dedicated emerging markets investors should be moderated, even as our dedicated emerging markets strategies underwrite this heightened uncertainty. The bar has been raised for the Brazilian authorities to show progress in restoring a policy mix that attracts investment, restores confidence and delivers robust growth with moderate inflation. Without this, the outlook for order in financial markets (and on the street) in Brazil is less certain,” writes Pimco Managing Director Michael Gomez.