In what is now an all too familiar theme for Latin America bulls, Brazil exchange traded funds are being punished Friday after J.P. Morgan downgraded its view on the country’s sovereign debt to underweight from market weight.
The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest and most heavily traded ETF tracking Latin America’s largest economy, is off 2.6% and is trading at what appears to be a new 52-week. But wait. There’s more and it is not good news.
At this writing, EWZ currently resides just below $32. To put EWZ at a $32 handle into perspective, that is a price level the ETF never violated on a closing basis during the financial crisis. In fact, it has been nearly 10 years since EWZ closed below $32. [Brazil ETFs Rocked by Petrobras Downgrade]
To be fair, EWZ is far from the only Brazil ETF offender Friday. Of the 31 ETFs that have thus far hit new 52-week lows today, six are Brazil funds. Underscoring the weakness in Latin American equities and ETFs this year, three of today’s other 52-week low ETFs are Latin America single-country funds.
In its downgrade of Brazilian debt, J.P. Morgan cited “risks from macro fundamentals are compounded by uncertainty from the impact on the sovereign from Petrobras (NYSE: PBR), which will likely lead to wider spreads versus sovereign peers over the coming months,” reports Dimitra DeFotis for Barron’s.
Petrobras, Brazil’s state-controlled oil company and one of EWZ’s largest holdings, has been an albatross on the ETF. J.P. Morgan also lowered its rating on the company’s bonds to neutral, according to Barron’s. That comes after Moody’s Investors Service took its rating on Petrobras bonds to junk status late last month.
A widening corruption probe, one that has ensnared Brazilian President Dilma Rousseff, has sent American depositary receipts of Petrobras lower by nearly 18% this year. Making matters worse is that it is now widely known that Rousseff had ample opportunity to stop graft at Petrobras.
“A Reuters review of a 2009 federal investigation of Petrobras, and interviews with those who conducted it, indicates Rousseff missed opportunities to stop the graft before it erupted into a crisis so big it could push Brazil’s slow-growing economy back into recession next year,” Reuters reported. Rousseff served as Petrobras chairwoman from 2003 to 2011. [Giving up on Brazil ETFs]
“J.P. Morgan notes that about 70% of Petrobras debt is denominated in dollars. As of the third quarter of 2014 the company had $135.4 billion of debt and roughly $11.5 billion was short-term debt,” according to Barron’s.
That is problematic on multiple fronts. First, that short-term debt of $11.5 is more than 25% of Petrobras’ current market value. Second, dollar-denominated is bad news because the WisdomTree Brazilian Real ETF (NYSEArca: BZF) is one of the other Brazil ETFs making new lows today.
The only Brazil ETF that has delivered anything resembling noteworthy performance this year is the ProShares UltraShort MSCI Brazil Capped (NYSEArca: BZQ), which has surged 23%. However, investors have missed the boat, pulling almost $3.2 million from BZQ this year. Nearly $276 million has been pulled from EWZ year-to-date.
iShares MSCI Brazil Capped ETF