The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) rose 1.7% yesterday, but that was after the largest exchange traded fund tracking Latin America’s largest economy hit another new low, one of the almost seven-year variety.
New details regarding Brazil’s tenuous grasp on an investment-grade credit rating are emerging and those details could limit the near-term upside for EWZ and rival Brazil ETFs. On Tuesday, Standard & Poor’s pared its outlook on Brazil’s rating to negative from stable. S&P did not shy away from noting that could lower Brazil’s sovereign debt rating to junk territory. The ratings agency currently rates Brazilian debt BBB-, the lowest investment grade.
“S&P affirmed Brazil’s credit rating at BBB-minus, the lowest possible investment grade rating, and could downgrade the nation over the next 12 to 18 months,” according to EmergingEquity.org. “S&P said it believes that there is a “greater than one-in-three likelihood that the policy correction will face further slippage given fluid political dynamics and that the return to a firmer growth trajectory will take longer than expected.”
In February, Moody’s downgraded debt issued by Petrobras (NYSE: PBR) to Ba2, two levels below investment grade, stoking speculation regarding Brazil’s sovereign credit rating. 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]
For its part, S&P is reversing course after upwardly revising its outlook on Brazilian debt to stable from negative last year. Amid a corruption scandal at Petrobras (NYSE: PBR), Brazil’s state-run oil company and one of EWZ’s largest holdings, high interest rates, a rising current account deficit and slack economic growth, investors have grown impatient with EWZ and Brazilian stocks. [Bail or Buy With Brazil ETFs]
Investors have pulled nearly $813 million from EWZ this year, the worst outflows from any of the five major single-country ETFs tracking Latin American nations.
iShares MSCI Brazil Capped ETF
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.