Following a precipitous decline that saw the fund plunge 22% from late May to early July, entering a bear market in the process, the iShares MSCI Brazil Capped ETF (EWZ) attempted a modest rally that failed in August.
The ensuing rally looked far stronger as EWZ appeared to have found firm support in the $41-$42 area. By October, EWZ, the largest Brazil ETF by assets, was trading over $50 and some investors were thinking that perhaps the darkest clouds for Brazil and EWZ had passed. [Brazil ETFs Bounce as Central Bank Fights Inflation]
Dark clouds, perhaps too many to foster confidence among investors remain, and that explains EWZ’s recent tumble. Accounting for the Tuesday loss of 1.3% the ETF is sitting on at this writing, EWZ is lower by almost 7% in the past month. Laboring just pennies above $46, EWZ risks its first close below that level since early September. [Bad Signs for Emerging Markets ETFs]
Brazil, Latin America’s largest economy, has been stung on multiple fronts this year. Slack global commodities demand has sent shares of Vale (VALE), the world’s largest iron ore producer and one of EWZ’s top holdings, down almost 29%. Petrobras (PBR), Brazil’s state-run oil company, is once again one of the world’s worst-performing major oil stocks. Two Petrobras securities combine for over 12% of EWZ’s weight.
Inflation of 5.84% persists despite rampant increases to the benchmark Selic rate and economic growth is expected to be just 2.5% this year, a third of what Brazil posted in 2010. GDP growth of 2.5% is not much better than what the U.S. offers and the ETF trade-off is poor. Not only has EWZ significantly lagged the S&P 500, but the former has a three-year standard deviation of 26.6%, according to iShares data.
So fragile has the Brazilian economy become that there is growing fear the country suffer a sovereign rating downgrade. Last month, Moody’s pared its outlook on Brazilian sovereign bonds to stable from positive. A move to junk status for Brazil appears unlikely, but a downgrade to a lower investment-grade rating cannot be ruled out at this juncture. [Bond ETFs Vulnerable After Moody's Changes Brazil View]
EWZ is not the only offender in the Brazil ETF bunch. The Market Vectors Brazil Small-Cap ETF (BRF) is flirting with its first close below $30 since late August while the Global X Brazil Financials ETF (BRAF) has plunged 11% in the past month.
iShares MSCI Brazil Capped ETF