The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) and other Brazil exchange traded funds have been enjoying a mostly excellent 2014, but that ebullience has encountered some resistance in recent days. Investors’ willingness to stick by EWZ and Brazilian stocks in the run-up to next month’s national elections is being tested Tuesday after Moody’s Investors Service lowered its outlook on Brazil’s sovereign debt rating to negative from stable.
That news has EWZ, the largest Brazil ETF, down about 1% in midday trading, extending the ETF’s one-week plunge to 6.3%. That represents a swift change in sentiment for EWZ, which closed at $53.90 on Sept. 2, its highest close since May 2013.
The Moody’s news is not the only glum headline to impact Brazilian equities in recent days. Brazil, Latin America’s largest economy, officially fell into a recession in the first half of 2014. That should play into the hands of Brazilian Socialist Party candidate Marina Silva, but some recent polls show support firming for embattled incumbent President Dilma Rousseff. [Maybe a Big Day for Brazil ETFs]
Moody’s rating action “reflects the rising risk that sustained low growth and worsening debt metrics indicate a reduction in Brazil’s creditworthiness, which would trigger a downward migration in its credit rating,” said the ratings agency.
Moody’s expects Brazilian GDP to grow less than 1% this year, the country’s worst rate since 2009, and by just 2% in 2015.
“The primary surplus has been declining consistently since 2011. Moody’s expects government debt metrics could deteriorate further in view of declining primary surpluses in the context of low GDP growth and higher interest rates. If persistently weak growth is not reversed, this condition will further erode Brazil’s fiscal position and materially undermine its credit profile, raising the prospect of further deterioration in government debt metrics and diminution in the government’s financial strength,” added Moody’s.
Still, it is important to note that Moody’s did not lower Brazil’s sovereign credit rating, something Standard & Poor’s did in late March. S&P lowered the country’s sovereign debt rating to BBB-, the lowest investment grade. [Brazil ETFs Deal With Ratings Downgrade]
Since March 25, the day after the S&P downgrade was revealed, EWZ posted a 20.5% gain heading into Tuesday. The iShares MSCI Emerging Markets ETF (NYSEArca: EEM) was up 13.8% over the same period.
EWZ’s recent swoon comes at an inopportune time for investors arriving late to the ETF’s party. After struggling to capture new assets even as it surged late in the first quarter and through the second quarter, EWZ had added $133 million in new capital this month while its share price has tumbled.
iShares MSCI Brazil Capped ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.