Some Doubt Brazil Stock, ETF Rally

  • EWZ lost nearly 42% last year after losing 16.5% in 2014 and 2013
  • EWZ is higher by almost 26% year-to-date due in part to the country’s corruption crackdown
  • In September, Standard & Poor’s downgraded Brazil’s sovereign credit rating to junk status, becoming the first major ratings agency to do so

Heading into this year, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) was in a bad place. The largest exchange traded fund tracking Latin America’s largest economy lost nearly 42% last year. That after losing an average of 16.5 percent in 2014 and 2013.

Bolstered by a rebounding currency and commodities prices, EWZ is higher by almost 26% year-to-date. The move higher by Brazilian stocks has also been aided by the country’s corruption crackdown. Earlier this month, Brazilian shares jumped as many traders believed the country is moving past a political gridlock that could lead to changes in the government and potentially kick-start the stagnate economy, Bloomberg reported.

The Brazilian rally went into high gear after former President Luiz Inacio Lula da Silva was detained, adding to speculation that support will grow to impeach his successor, President Dilma Rousseff. Amid intensifying protests, some market observers believe Rousseff’s days in power are numbered. However, doubters remain.

Brazil’s “government has not been able to achieve a primary budget surplus since the middle of 2014. Real interest rates at 6–7%, recession, and controlled inflation may only trigger additional debt dynamics deterioration. We believe the only politically feasible path from here will be a significant increase in ex-ante and ex-post inflation and real interest rates,” according to a note from RBC posted by Dimitra DeFotis of Barron’s.

Brazil’s 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]