The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking stocks in Latin America’s largest economy, slid Monday after policymakers there had to annul the recent vote to impeach President Dilma Rousseff due to procedural errors.
Entering Monday, EWZ had been one of the best-performing single-country emerging markets ETFs this year with a gain of over 47%; a gain that was accrued in large part due to traders pricing in regime change in Brazil.
Related: Corruption Probe Plagues Brazil ETF
Earlier this year, 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.
Coming into this year, traders were ditching Brazilian stocks and the relevant ETFs as Rousseff failed to stimulate the economy prevent credit downgrades.
[related_stories]Now some investors are reevaluating Brazilian stocks, something that has benchmark indexes there trading at the highest multiples in a decade. However, Brazilian assets became more appealing this year thanks to the weaker dollar, stronger commodities prices and a spate of bad news for Rousseff.
Previously, bad news for Rousseff has usually meant good news for EWZ, but that was not the case on Monday. Some traders were prepared for that with some arguing that Rousseff’s situation is so dire that markets priced in the fact that congress would push her impeachment forward.
Related: Bad News for Brazil ETFs
“…local news sources in Brazil are reporting that the acting leader of the lower house, Waldir Maranhao, has annulled the vote that took place last month, which impeached President Rousseff and moved proceedings onto the Senate. (The previous speaker of the lower house, Eduardo Cunha, under whom the vote was cast, was suspended late last week while he faces corruption charges.) Mr. Maranhao says the decision to annul the vote was taken on the basis of procedural errors and that, as a result, the vote must return to the lower house. Up until this interjection, a vote to put Rousseff on trial was scheduled for the Senate on Wednesday,” according to a Capital Economics note posted by Dimitra DeFotis of Barron’s.
Traders willing to bet on more downside for EWZ can consider the ProShares UltraShort MSCI Brazil Capped ETF (NYSEArca: BZQ). BZQ attempts to deliver two times inverse of the daily performance of the MSCI Brazil 25/50 Index, which acts as the underlying index for EWZ.
“What happens next is unclear. It’s by no means certain that Mr. Maranhao has the authority to return the vote to the lower house, and the ensuing confusion risks triggering a constitutional crisis. What’s more, even if the vote is returned to the lower house, it seems unlikely that the outcome will be radically different from the first vote. The odds are still skewed heavily towards president Rousseff being removed from office,” adds Capital Economics in the note posted by Barron’s.
For more information on the Brazil ETF market, visit our Brazil category.
iShares MSCI Brazil Capped ETF
