Up 14.1% year-to-date, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) trails only the WisdomTree India Earnings Fund (NYSEArca: EPI) for top honors among single-country BRIC ETFs this year.
EWZ, the largest country-specific ETF tracking a Latin America economy, and other Brazil ETFs have been bolstered by a resurgent real and the perception that Brazilian stocks are emerging markets value bets. Another primary catalyst behind EWZ’s 2014 bullishness is the President Dilma Rousseff’s waning popularity ahead of Brazil’s national elections in October.
EWZ and rival Brazil ETFs have previously shown an intimate correlation to negative poll news for Rousseff. In late April, EWZ soared to its highest levels since November 2013 a poll from MDA showed Rousseff’s support dipped to 37% from almost 44% in February. [Brazil ETF Pops as Polls Show Rousseff Slumping]
However, EWZ’s bullishness could be put to the test by familiar source of consternation for the ETF: Petrobras (NYSE: PBR). The struggling state-run oil producer’s decision to pay the Brazilian government $6.8 billion for drilling rights in the area that is home to the massive Buzios field has stoked speculation Petrobras may need to commence another dilutive share offering.
Petrobras is considering selling assets and restructuring other projects to help shoulder the cost, but the company is already the most indebted publicly traded oil company, according to Bloomberg.
Petrobras forecast the impact to its current five-year budget will be an upward adjustment of just 3%, but some of the company’s shareholders and EWZ investors have reason to be concerned. Just 13 months ago, the company sold $11 billion in bonds in what was, at the time, the largest corporate bond sale by an emerging markets firm.
In the first quarter, Petrobras sold $8.5 billion in debt. The company, which accounts for over 11% of EWZ’s weight, “accounts for 40 percent of debt sold by Latin American governments or companies this year, compared with 9 percent in 2013,” Bloomberg reported.
Making it difficult to rule out a dilutive share offering as a means of paying for access to the Buzious field is Petrobras’ history of mega secondary offerings. In 2010, the company commenced a $70 billion secondary offering in what is still the largest share sale by a company traded on a major U.S. exchange. In the year following that share sale, EWZ slumped 15.3%. [Petrobras Pushes Brazil ETF Lower]
iShares MSCI Brazil Capped ETF
