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Political Risk Hangs Over Brazil ETFs

This article was originally published on ETF Trends.com.

The iShares MSCI Brazil Capped ETF (EWZ) , the largest exchange traded fund tracking Brazilian equities, is up 17% this year. On its own, that is an impressive showing, but one made all the more so when considering the spate of political controversy again facing Latin America's largest economy.

Last year, Brazilian stocks performed well, though EWZ lagged the MSCI Emerging Markets Index amid political controversy. Political headwinds continue lingering in Brazil.

“On 24 January 2018, the Federal Regional Court of Appeal of the 4th Region (TRF-4) unanimously upheld the conviction of former president Luiz Inácio Lula da Silva for corruption and money laundering,” said Markit. “Additionally, the court increased his prison sentence from 9.5 years to 12 years. The judges did not request Lula's immediate arrest, and he can still appeal, but the fact that the ruling was unanimous constitutes a serious setback for his efforts to stay free and able to run for president in October 2018. However, the Workers' Party (Partido dos Trabalhadores: PT) remains adamant that he would be its presidential candidate.”

Brazil is undergoing massive reforms, including a 20-year constitutional spending cap tied to inflation, which has helped bring the economy out of a deep recession and strengthened investment confidence. The country now is working on passing pension reforms. Meanwhile, the Brazilian market is enjoying an acceleration in earnings growth.

“Lula is comfortably leading in the opinion polls with 36%, nearly double the score registered by Jair Bolsonaro, the right-wing candidate, who consistently has come up second in most polls,” said Markit. “As stated by the electoral Clean Record Law (known as Ficha Limpa), any candidate tried and convicted of crime cannot run for public office.”

In 2017, federal police carried out search and arrest warrants throughout the capital in response to O Globo reports on leaked testimony indicating that President Michel Temer approved payoffs to acquire the silence of Eduardo Cunha, the man behind last year’s ouster of former president Dilma Rousseff. Recently, Temer survived an effort to suspend him on corruption allegations.

In addition to the large-cap EWZ, Brazilian small-caps are getting in on the act. The VanEck Vectors Brazil Small-Cap ETF (BRF) and the iShares MSCI Brazil Small-Cap ETF (EWZS) are both up more than 10% this year.

Traders who are betting on a quick turnaround could look to the two times leveraged ProShares Ultra MSCI Brazil (UBR) o r the three times leveraged Direxion Daily Brazil Bull 3x Shares (BRZU) .

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