A Weird Political Catalyst Could Spark Brazil ETFs

Before falling out of your seat, it is best to note this is far from endorsement of the iShares MSCI Brazil Capped ETF EWZ and Brazil ETF brethren.

Year-to-date, EWZ and the Market Vectors Brazil Small Cap ETF BRF are down 26.8 percent and 36.8 percent, respectively, while the MSCI Emerging Markets Index is down “just” 8.9 percent. As has been widely covered in this space and elsewhere, Brazilian stocks and the corresponding ETFs have been a hot mess this year.

Simply put, long bets on EWZ have not been rewarded and positive catalysts have been nearly non-existent, but one might be looming. Brazil is awash in protests with participants calling for President Dilma Rousseff to be impeached. That makes sense. Rousseff is seen as at the heart of a wide-ranging corruption scandal at Petrobras PBR, one of EWZ's largest holdings. Plus, Brazil is mired in its worst economic slump in over two decades.

Related Link: Trying To Say Something Nice About Brazil ETFs

“Marchers took over Copacabana beach in Rio and also demonstrated outside congress in the capital Brasilia. Many wore the yellow shirts of the Brazilian football team, and sang the national anthem, carrying banners saying "Dilma Out". Police said about 137,000 people took part, but tens of the thousands of others were also involved in a demonstration in Sao Paulo,” BBC reported. 

Traders would do well to not be dismissive of the potential the anti-Rousseff protests have to provide a temporary lift to EWZ. As the BBC notes, anti-Rousseff protests took place in March and April. From its March low to its April high, EWZ surged 26.2 percent. Other historical data points further underscore how positively EWZ can react to headlines that are negative for Rousseff.

Go back to 2014, prior to the Rousseff's reelection. She was, at best, an embattled candidate for much of the year. For relevant U.S. history analogies, think more President Jimmy Carter in 1980 than President Ronald Reagan in 1984, meaning Rousseff's re-election was something of a surprise. From EWZ's March 2014 low to its August 2014 high, a period in which a spate of polls highlighting Rousseff's troubles emerge, the largest Brazil ETF surged nearly 38 percent.

This year, markets are so desperate to find something positive react to with Brazilian stocks that earlier this month, pundits were crowing about Moody's Investors Service not slapping a negative outlook on Brazil's sovereign credit rating. That reaction seemingly ignores Moody's taking Brazil's rating to the lowest investment grade and Standard & Poor's saying in July that there is greater than one-in-three chance that Brazil's credit rating will be further lowered in the next 12 to 18 months. 

Bottom line: This is not EWZ's first rodeo with Rousseff impeachment protests. In the essence of being realistic, impeachment is a far-flung concept, but as long as the issue stay on the front burner, EWZ and friends could see some relief.