Brazilian stocks and related exchange traded funds could be in for further pain as a depreciating real currency and fiscal tightening push the country into a recession.
The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) fell 7.9% over the past week and declined 6.5% year-to-date. EWZ also dipped 3.0% Tuesday, breaking below its short-term, 50-day support. [Brazil ETF Reaches a Critical Juncture]
According to the Brazilian planning ministry, Brazil’s gross domestic product is expected to fall 23% year-over-year as President Dilma Rousseff unwinds a multiyear stimulus program that has pushed the government deeper into debt, reports Joe Leahy for the Financial Times.
“We know that in a populist model you have a fake sense of prosperity in the short term,” Alberto Ramos, economist with Goldman Sachs, said in the FT article. “So after populism comes the adjustment and the adjustment is basically just giving back all these fake gains.”
The planning ministry attributes a major portion of the turn to the projected depreciation of about 21% in the real currency against the U.S. dollar. The ministry expects the real to end 2015 at R$3.22 from R$2.66 at the end of 2014. The real is already traded at a high of about R$3.29 back in March and currently sits at about R$3.15.
Meanwhile, the WisdomTree Brazilian Real ETF (NYSEArca: BZF), which follows real currency movements against the USD, has declined 9.9% year-to-date.
The real was the worst performing significant emerging market currency after Turkey’s lira currency depreciated 10.7% against the dollar this year.
Reflecting the deteriorating economic conditions, the country’s unemployment rate hit 6.4% in April, its highest in four years. Inflation is expected to rise to 8.26% at the end of the year and has also breached the central bank’s upper band of 4.5% plus or minus 2 percentage points.
Additionally, the government stated it would freeze R$69.9 billion in discretionary expenditures and hike taxes on banks and brokerages, among other measures.
iShares MSCI Brazil Capped ETF
For more information on Brazil, visit our Brazil category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.