Already in a tenuous technical spot because of a year-to-date
tumble of 11.5 percent, the iShares MSCI Brazil Capped Index Fund
) could be facing more troubling times ahead. Late Thursday,
Standard & Poor's lowered its ratings outlook on Brazil,
Latin America's largest economy, to negative from stable.
The S&P downgrade comes barely more than a week after
Brazil's central did the almost unimaginable in the current
environment by raising interest rates
by 50 basis points to eight percent
. The 50-basis point increase shows the Brazilian central bank's
resolve when it comes to fighting inflation.
However, that interest rate increase was not appease to
S&P. The ratings agency cited slowing economic growth, weaker
fiscal and external fundamentals "and some loss in the
credibility of economic policy" among reasons for the lowered
outlook. While S&P affirmed its BBB credit rating on Brazil,
it warned the negative outlook implies a one-in-three chance
Brazil's rising debt burden and fragile macroeconomic outlook
could result in a ratings downgrade over the next two years,
The Financial Times reported
In addition to rising rates and inflation, Brazil is also
dealing increasing unemployment, a plunging currency and concerns
its ability to host the 2014 World Cup
. Those factors explain why EWZ is off 9.3% in just the past
What's Next For EWZ? For the near-term impact that S&P's
outlook change can have on Brazil
investors need only to look to India. In April 2012, S&P cut
its outlook on India
to negative from stable
while warning Asia's third-largest economy could lose its already
tenuous grasp on the lowest investment-grade credit rating.
Obviously, there can be no guarantees that EWZ and other major
Brazil ETFs such a the Market Vectors Brazil Small-Cap ETF (NYSE:
) will follow a similar trajectory. However, over the 60 days
following S&P lowering its outlook on India, the WisdomTree
India Earnings ETF (NYSE:
) lost almost 12 percent while the Market Vectors India Small-Cap
) lost more than 15 percent.
On Friday, with U.S. stocks surging on the back of a strong
May jobs report, EWZ is off two-thirds of a percent and
struggling to stay above the important $50 area. BRF is down one
Bonds Already under pressure due to fears about the end of
quantitative easing, rising yields on U.S. 10-year Treasurys and
currency weakness, emerging markets bond ETFs, one of 2012's
favorite yield destinations, have suffered this year.
Plenty of those ETFs are heavy on Brazil and that is not a
good thing at a time when the yields on Brazilian 10-year
sovereign bonds have surged 104 basis points in the past month,
according to Bloomberg data
. The yield spread between those bonds and the equivalent U.S.
Treasurys is about 150 basis points.
With Brazil raising interest rates and now, a ratings agency
there is a chance of a sovereign downgrade, select emerging
markets bond funds could be in for more downside. The Market
Vectors LatAm Aggregate Bond ETF (NYSE:
) has 59 percent allocation to dollar-denominated holdings, but
bonds denominated it Brazilian real account for 7.8 percent of
the ETF's weight. Brazil is 20.8 percent of BONO's country
BONO has lost almost seven percent in the past month. The
iShares Emerging Markets Local Currency Bond Fund (NYSE:
) is another bond ETF to monitor. That ETF devotes allocates 12.3
percent of its weight real-denominated issues and is off almost
eight percent in the past month.
For more on ETFs, click
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