News of a possible impeachment for Brazilian President Dilma Rousseff has been viewed as a potential catalyst for the country’s downtrodden equity markets and the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), but investors should temper expectations of significant near-term upside for the largest Brazil exchange traded fund.
Brazil’s gross domestic product declined a record 4.5% year-over-year in the third quarter, or on pace for its worst recession since the 1930s, reports Joe Leahy for the Financial Times.
Brazil’s economy shrunk 1.7% in the three months ended September against a revised second quarter, worse than analysts’ expectations.
“It’s been a record number of corporate credit downgrades for Brazil this year, but 2016 could see a 10:1 ratio of cuts to upgrades next year, says Fitch, especially if the sovereign itself is downgraded,” according to a Seeking Alpha brief. “The agency currently has a negative outlook on Brazil and on the grades of more than half of the Brazilian companies it rates. The current grade for Brazil is BBB-, the lowest investment-grade level. S&P has already downgraded the country to junk status.”
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]
“Gains in Brazilian assets spurred by the move to impeach President Dilma Rousseff are unlikely to last as Latin America’s biggest economy struggles, Brazil’s Verde Asset Management said in a letter to clients,” reports Filipe Pacheco for Bloomberg. http://www.bloomberg.com/news/articles/2015-12-10/brazil-impeachment-rally-likely-to-be-short-lived-verde-says
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.
“Brazilian lawmakers initiated impeachment proceedings against Rousseff last week. Moody’s Investors Service said on Wednesday that it may cut Brazil’s rating to junk, which would make it the second major company to do so,” according to Brazil.
iShares MSCI Brazil Capped ETF
