The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is historically one of the more volatile single-country emerging markets exchange traded funds, a trait that is exacerbated when Brazil deals with political volatility as it has been in recent weeks.
EWZ, the largest ETF dedicated to Brazilian stocks, is down 13.1% over the past month as another political scandal rocked Latin America’s largest economy. Brazil’s latest brush with political volatility involves a corruption scandal surrounding President Michel Temer.
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.
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.
Fortunately for investors, for better or worse, it appears as though Temer will not be removed from office.
“The Brazilian Social Democratic Party, the main ally of President Michel Temer, said on Monday it would stay in his coalition for now, despite a move by younger members to break away from the scandal-plagued government,” reports Reuters. “Speaking at an executive meeting of the PSDB, they said a decision to stick with Temer was based on the need to support his austerity measures in Congress to balance Brazil’s overdrawn fiscal accounts.”
Earlier this year, federal police carried out search and arrest warrants throughout the capital in response to O Globo reports on leaked testimony indicating that Temer approved payoffs to acquire the silence of Eduardo Cunha, the man behind last year’s ouster of former president Dilma Rousseff.
Traders who are betting on a quick turnaround could look to the two times leveraged ProShares Ultra MSCI Brazil (NYSEArca: UBR) or the three times leveraged Direxion Daily Brazil Bull 3x Shares (NYSEArca: BRZU).
“Senior PSDB leaders managed to hold back a movement by younger lawmakers who want to quit the government and pull the four PSDB ministers out of Temer’s cabinet,” according to Reuters. “Many of the party’s 46 lawmakers in the lower chamber of Congress wanted to abandon Temer’s coalition. They are worried voters will punish them at the polls next year for being part of a government widely perceived as corrupt.”
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