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 ratings are constrained by the structural weaknesses in its public finances, high and rising government debt burden, weak growth prospects, weaker governance indicators compared with peers, and repeated episodes of political instability that undermine policy-making and have negative implications for the economy,” adds Fitch. “These weaknesses are counter-balanced by its economic diversity and entrenched civil institutions, with its per capita income higher than the ‘BB’ median. The country’s capacity to absorb shocks is bolstered by its flexible exchange rate, robust international reserves position, a strong net sovereign external creditor position, and deep and developed domestic government debt markets.”

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 impeached. Investors’ tolerance for ongoing political corruption and volatility in Latin America’s largest economy could be wearing thin.

For more information on the Brazilian markets, visit our Brazil category.