Brazil ETF Defiant In The Face Of Political, Credit Headwinds

Last year, the iShares MSCI Brazil ETF EWZ, gained 23.7 percent, a performance that on its own sounds impressive, but in reality is not when considering the MSCI Emerging Markets Index jumped 37.3 percent.

EWZ, the largest exchange traded fund dedicated to stocks in Latin America's largest economy, is trying to shed that laggard status. To start 2018, EWZ is higher by 15.8 percent, well ahead of the 9 percent returned by the MSCI Emerging Markets Index.

The Brazil ETF is accruing that impressive start to 2018 in the face of controversy, a familiar theme for seasoned Brazil investors.

Political Controversy Again

Brazil consistently scores poorly on various rankings of country corruption. Perhaps one reason why is that the country has a hard time quitting corrupt politicians. For example, former President Luiz Inácio Lula da Silva is running again. Lula is doing so even though a corruption conviction against was recently upheld by a Brazilian court.

“On Jan. 24, the Federal Regional Court of Appeal of the 4th Region 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 1/2 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 remains adamant that he would be its presidential candidate.” 

Political volatility predictably makes its way to stocks. EWZ has a three-year standard deviation of 34.6 percent, more than double the comparable metric on the MSCI Emerging Markets Index.

Credit Concerns

Brazil is already one of the largest developing economies to carry a junk credit rating and, earlier this month, Standard & Poor's lowered that rating.

“S&P lowered its long-term rating for Brazil sovereign debt to BB- from BB previously, with a stable outlook, citing less timely and effective policymaking,” reports Reuters. “S&P also said there was a risk of greater policy uncertainty after this year’s elections.”

For now, investors are standing pat as EWZ has not taken in any new money this year. Nor has the Brazil ETF seen any outflows. Last year, investors added $2.44 billion to EWZ.

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