Brazilian Bungle: Bad News Mounts For Brazil ETFs

Not that they need it, but exchange traded funds tracking Brazilian are on the receiving end of more glum news and price action again on Monday.

In late trading Monday, just over 130 ETFs have hit 52-week lows and five of those funds are dedicated Brazil products. That motley crew includes the Market Vectors Brazil Small-Cap ETF BRF and the EGShares Brazil Infrastructure Index Fund BRXX, both of which are members of Monday’s all-time low club.

Of course, the iShares MSCI Brazil Capped ETF EWZ, the largest ETF tracking Latin America’s largest economy is not immune. EWZ is off 1.3 percent, extending its 90-day loss to nearly 24 percent. This is how bad things have gotten for Brazil ETFs: Struggling to stay above $28, EWZ would need to gain about 25 percent to match its Nove. 1, 2008 close.

That’s right. EWZ now resides 20 percent below where it did during the darkest days of the global financial crisis.

It appears things could get worse before they get better for Brazil ETFs, particularly after economists ratcheted down 2015 and 2016 economic growth expectations. The glum case for this year was widely known, but lower forecasts for next deal a blow to the theory, held by some fund managers, that 2016 would bring a rebound for Brazilian stocks.

"Brazil's gross domestic product is expected to contract 1.76% this year, compared with a contraction of 1.70% expected last week, according to a weekly central-bank survey of 100 economists. For next year, economists reduced their view for an expansion of 0.20%, versus 0.33% projected in the prior week. The forecasts for both years marked the second consecutive downward revision by economists," according to Dow Jones Newswires. 

There is also chatter that Brazil’s central bank will raise the benchmark Selic rate when it meets this week with some analysts forecasting a rate increase of 50 basis points.

"The government has been trying to fight inflation by increasing the borrowing cost. In fact, since September of 2014, the Selic overnight lending rate was raised by 275 basis points to 13.75 percent. However, the inflation rate is still on an upward trend, accelerating for the sixth straight month in June to its highest since December of 2003," according to Trading Economics. 

There are two points that prove Brazil’s scorched earth rate hike campaign has meant precious little to EWZ. First, the ETF is off almost 47 percent since September 1, 2014. Second, the ETF has fallen that much as rates have been rising even with an almost 32 percent weight to bank stocks, the very names that should benefit as interest rates jump.