Market credit risk could drag on Brazil stocks and country-specific exchange traded fund, but India ETFs may be less susceptible as the country enjoys healthier finances.
According to a Fitch Ratings survey, Brazil showed the greatest risk to emerging market corporate debt financing over the next 12 months, relative to emerging market sovereign debt, reports Dimitra DeFotis for Barron’s.
Analysts pointed to Brazil where contagion poses a threat on account balances, political challenges and rising U.S. interest rates.
Year-to-date, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) has declined 14.3%. The Brazilian markets have been faltering as the nation struggles to shore up the budget and keep its investment-grade credit rating at a time when the economy is set for the worst recession in 25 years.
Slack GDP estimates and a tumbling real are among the downside catalysts pressuring Brazilian stocks and EWZ. Brazil’s 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. [Brazil ETF Slides, Bleeds Assets]
Fitch also pointed out that the economic contraction in Brazil this year could impeded reforms that Brazil President Dilma Rousseff’s administration is trying to implement.
“Latin American non-financial corporates, led by those in Brazil, have significantly increased their dollar borrowing while US rates have been low, increasing their exposure to a rising dollar,” according to Fitch Ratings. “As the Central Bank of Brazil has tightened policy and allowed the real to depreciate, Brazilian issuers face rising internal and external interest rates during a recession.”
Consequently, the ratings agency has placed a negative outlook on Brazil’s BBB-rating.
On the other hand, India is better situated to defend against shocks, and the credit rating agency held a stable outlook on the country’s rating of BBB-.
Year-to-date, the WisdomTree India Earnings Fund (NYSEArca: EPI) fell 2.2%, iShares India 50 ETF (NasdaqGM: INDY) was down 0.2% and PowerShares India Portfolio (NYSEArca: PIN) rose 2.5%. [Investors Piling Into India Markets, Stock ETFs]
“We think India has made more tangible progress in reducing its exposure to Fed-driven market volatility since the ‘Taper Tantrum’ two years ago,” according to Fitch Ratings. “Foreign-exchange reserves have grown and are high in terms of current exchange payments relative to peers. The current account remains in deficit, but has narrowed, initially helped by temporary gold import curbs, but also due to the fall in international oil prices and lower inflation reducing investment demand for gold. Structural reforms and the resulting pick-up in investment support India’s growth outlook, and we forecast growth to accelerate to 8.1% in FY17.”
For more information on Brazil, visit our Brazil category.
Max Chen contributed to this article.