The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking stocks in Latin America’s largest economy, had an eventful week last week. EWZ’s turbulence was punctuated with a heavy volume gain of almost 7% Friday after the ETF plunged more than 16% on Thursday.
As ETF Trends reported last Friday, money managers from Morgan Stanley to BNP Paribas SA argue that the short-term volatility is not changing their long-term bullish view on Brazil. Morgan Stanley said it remains “constructive” on Brazil due to improvements in the emerging country’s external accounts and the central bank’s ability to minimize volatile moves. BNP Paribas Investment Partners said the “political noise” would not alter its view on Brazil, even if there is an orderly transfer of power in the government.
For now at least, Brazil’s credit ratings appear firm.
“Fitch Ratings has affirmed Brazil’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BB’. The Rating Outlook is Negative. The issue ratings on Brazil’s senior unsecured Foreign and Local Currency bonds are also affirmed at ‘BB’. The Country Ceiling is affirmed at ‘BB+’ and the Short-Term Foreign Currency and Local Currency IDRs at ‘B’,” said Fitch in a note out Friday.
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.