After showing some signs of life in recent weeks, exchange traded funds tracking Brazilian debt and equities could be put to the test after Standard & Poor’s Tuesday lowered the country’s sovereign debt rating to BBB-, the lowest investment grade.
“Mixed policy signalling by the government, with negative implications for fiscal accounts and economic policy credibility, coupled with a subdued outlook for growth over the next two years continue to weigh on Brazil’s policy flexibility and performance profile,” said the ratings agency, according to Reuters.
The news broke Monday evening after the close of U.S. market s and after the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) closed higher by 1.2%. Since the start of February, EWZ is up nearly 11% while the Market Vectors Brazil Small-Cap ETF (NYSEArca: BRF) is higher by 5.5%.
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. That should come as some relief to 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. [Considering Brazilian Bond ETFs]
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]