The downtrodden iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is rebounding…sort of. After sliding to its lowest levels in nearly 10 years last week, the largest ETF tracking Latin America’s largest economy is up nearly 4% to start this week.
While EWZ’s two-day pop is a welcomed sight for investors that have endured the ETF’s 16.7% year-to-date decline, enough to make it one of the 10 worst non-leveraged ETFs on the year, Brazil remains bereft of legitimate catalysts to earnestly jolt its equity market higher.
“Arguably the biggest disappointment has been the steady erosion in economic growth. In 2010 Brazil grew by over 7%, but since then a drop in commodity prices and a lack of structural reforms have been punishing for the economy. Brazil did not grow at all last year, and is expected to stagnate again in 2015,” said BlackRock Chief Investment Strategist Russ Koesterich in a recent note.
As the Wall Street Journal reports, traders are miffed by the ineptitude of the Brazilian central bank in defending the real. While more than 20 global central banks have lowered interest rates this year, Brazil cannot follow suit because the real is already tumbling and inflation there remains high. However, with a benchmark borrowing rate of 12.75%, one of the highest in the emerging world and one that is up nearly 200 basis points in the past year, Brazil makes for an unlikely booster of rates. [More New Lows for Brazil ETFs]
As Koestericah notes, Brazil’s rate of inflation lingers above 7%. Said another way, the hands of Brazil’s central bank are tied at a time when its counterparts across the globe are cutting rates.
Then there is corruption. Last Friday, protesters took to Brazilian streets in support of Petrobras (NYSE: PBR) and President Dilma Rousseff, perhaps further irritating investors that endured a tumble that has seen the Brazilian oil giant be the worst-performing oil stock in the world over the past five years. However, there are also calls for Rousseff’s impeachment. [Things are Really Terrible for Brazil ETFs]
Transparency International gave Brazil a 2014 corruption score of 43, far worse than the 73 earned by Chile.
“An ongoing bribery investigation centered around Petrobras was yet another pain point. In recent weeks, the scandal has ensnared more politicians with allegations now reaching senior members of Congress. As the Petrobras scandal worsens, both stocks and bonds have sold off, with 10-year rates climbing back up to record levels,” according to Koesterich.
Earlier this month, J.P. Morgan downgraded its view on Brazil’s sovereign debt to underweight from market weight while lowering its rating on Petrobras bonds to neutral.
Investors have pulled $267 million from EWZ less, nearly $200 million less than has been pulled from the iShares MSCI Mexico Capped ETF (NYSEArca: EWW).
iShares MSCI Brazil Capped ETF