Up 54.3% year-to-date, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, is one of 2016’s best-performing single-country emerging markets ETFs.
However, some of the wind has come out of EWZ’s sails in recent weeks. EWZ slid almost 4.2% last week and over the past month, the ETF is lower by 11.6%, a decline that has taken the fund below its 20- and 50-day moving averages.
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Earlier this year, EWZ surged on optimism that President Dilma Rousseff will finally be removed from office and that a new administration may steer the economy toward growth. Brazilian markets strengthened on hopes that acting President Michel Temer, who will remain as the country’s leader if the Senate decides to impeach Rousseff, will be to renew economic growth and damp corruption that has long plagued the Brazilian economy.
However, there are other pressing issues for Brazilian stocks, including ongoing concerns about the country’s banks. That issue is particularly relevant for EWZ because the ETF allocates 36% of its weight to financial services stocks, more than double its second-largest sector weight, consumer staples.
“Fitch maintains a negative rating and sector outlook on the Brazilian banking industry. The overall asset quality has deteriorated and, although still manageable, the still harsh environment may limit the increase of credit into the system both by the concession and demand side,” said Fitch Ratings in a note posted by Dimitra DeFotis of Barron’s.