The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, and Brazilian American Depositary Receipts (ADRs) dealt with some drama Wednesday as media reports revealed Brazil’s Supreme Court has launched a new corruption probe targeting some high-level public officials.
Some investors are reevaluating Brazilian stocks, something that has benchmark indexes there trading at the highest multiples in a decade. However, Brazilian assets can be more appealing with the help of a weaker dollar and stronger commodities prices. The Brazilian real has been one of the better-performing emerging markets currencies this year.
Brazilian stocks have rallied this year and banks in Latin America’s largest economy appear inexpensive, those institutions are faced with declining consumer credit quality. Additionally, some Brazilian states have recently delayed payment to public workers, potentially crimping the ability of those workers to repay loans taken from Brazilian banks.
However, EWZ and Brazilian assets are not strangers to corruption fears. It was corruption allegations that were the undoing of former President Dilma Rousseff and ultimately forced her impeachment. The current administration is being stung by the new corruption investigation.
“Brazil’s Supreme Court announced Tuesday that corruption investigations have been ordered for eight ministers and dozens more top politicians in a sweeping decision that affects almost one third of President Michel Temer’s Cabinet and many of his top allies,” according to ABC News. “In total, 108 people will be investigated following Justice Edson Fachin’s ruling, which was itself the product of more than 74 probes involving plea bargain deals and testimony from former and current executives with Odebrecht, a construction giant at the center of a bribes-for-contracts scandal.”
The corruption investigation comes as Brazil is trying to regain to its investment-grade credit rating. A potential catalyst for EWZ and Brazilian stocks is the country’s effort to regain its investment-grade credit rating. President Michel Temer is trying to restore confidence in the country’s finances after losing its investment-grade rating in 2015.
Investigating Temer’s cabinet could weigh on Brazilian equities going forward because he was Rousseff’s replacement and Brazilian stocks rallied in anticipation of Rousseff being booted for tolerance. Investors’ tolerance for ongoing political corruption and volatility in Latin America’s largest economy could be wearing thin.
“The politicians have all denied any wrongdoing. Temer has temporary immunity from prosecution because Brazilian presidents can only be charged for crimes they committed during their term in office,” reports ABC.
For more information on the Brazil ETF market, visit our Brazil category.