The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is down more 39% year-to-date, which is to say it has been an eventful year for the largest Brazil exchange trade fund. Confounding investors is that the near-term outlook for Brazilian stocks is murky at best and volatility (and controversy) there do not appear to be ebbing.
Multiple factors are dragging on the Brazilian economy. Unemployment rose to 7.9% in September from 4.7% in October last year. Inflation has jumped over 10% for the first time since 2002. The budget deficit has widened to 9.5% of GDP. Additionally, lower commodity prices, diminishing consumer credit boom and a corruption scandal at state-run oil giant Petroleo Brasileiro have all weighed on the economy. [Corruption Probe Plagues Brazil ETF]
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]
The situation surrounding a potential impeachment of Brazilian President Dilma Rousseff has been a problem as well as investors try to sort out if regime change is really coming to Latin America’s largest economy.
“A controversial congressional vote that stacked an impeachment committee with opponents of President Dilma Rousseff has been found to be legitimate by the country’s Supreme Court justice which suspended proceedings against her last week,” according to a Seeking Alpha Brief. “The move comes after Fitch downgraded Brazil’s credit rating to BB+, becoming the second major credit rating agency to strip the country of its investment-grade status.”
Against the backdrop of ongoing concerns, more aggressive traders may turn to a bearish or inverse ETF option to capitalize on continued weakness in Brazilian equities. For instance, the ProShares UltraShort MSCI Brazil Capped ETF (NYSEArca: BZQ) takes the -2x or two times inverse of the daily performance of the MSCI Brazil 25/50 Index, which acts as the underlying index for EWZ.
In September, Standard & Poor’s downgraded Brazil’s sovereign credit rating to junk status, becoming the first major ratings agency to do so. Even after the retreat, Brazilian stocks may have further to fall as the economic contract worsens.
“What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said, according to Bloomberg.
iShares MSCI Brazil Capped ETF
