The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian stocks, fell by more than 1.5% Tuesday, extending a gloomy run that has seen the fund tumble nearly 44% over the past year.
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]
Brazil’s real is in a wicked slump against against the dollar and resides at multi-year lows against the greenback. The real could face increasing pressure as global investors price in the rising odds of additional credit downgrades for Brazil. [Bad News for Brazil ETFs]
However, a potential catalyst looms for Brazilian stocks, though investors should note that catalyst is far flung at best. That catalyst is the possible impeachment of Brazilian President Dilma Rousseff.
“A group of high-profile lawyers, including a former member of the ruling Workers’ Party, will file a request on Wednesday to begin impeachment proceedings against Brazilian President Dilma Rousseff, alleging she continued to doctor fiscal accounts this year,” reports Bloomberg.
Rousseff’s popularity has sagged amid wide-ranging graft scandal at Petrobras (NYSE: PBR), Brazil’s state-run oil company. Additionally, many Brazilians and investors blame Rousseff for the loss of Brazil’s investment-grade credit rating. Last month, Standard & Poor’s downgraded Brazil to junk status.
In February, Moody’s downgraded debt issued by Petrobras to Ba2, two levels below investment grade, stoking speculation regarding Brazil’s sovereign credit rating.
“Lawyers writing the impeachment request will say Rousseff can be removed from office for manipulating fiscal accounts this year, continuing with financial practices implemented during her previous term that have been already censored by the country’s audit court. Rousseff says she hasn’t done anything wrong,” according to Bloomberg.
The problem for investors is that while the idea of impeaching Rousseff is gaining momentum, the process could last well into next year, if not longer and still not bring the result market participants are looking for. However, any appearance that Rousseff is vulnerable to being removed from power could bring short-term upside to EWZ.
iShares MSCI Brazil Capped ETF
