Brazil Impeachment Process Boosts ETFs

Brazil is one step closer to impeaching its president, Dilma Rousseff. And that may be good news for ETF investors.

A vote in the country’s lower house this weekend found more than two-thirds of lawmakers in favor of impeaching the president for her alleged involvement with widespread corruption and bribery scandals, and for her mishandling of the budget for political gain, according to several news outlets.

The vote now goes to the country’s Senate, and if approved there, Rousseff would have to step down as early as May to face trial.

To investors, the Rousseff tenure has seen Brazil dive into its worst economic recession in more than a century. Her presidency has also seen the demise of key companies such as Petrobras due to widespread corruption. An impeachment is being perceived as a positive, at least in the short term.

Performance Rebound This Year

The recent performance of a fund such as the iShares MSCI Brazil Capped (EWZ | B-96)—the largest Brazil equity ETF, with more than $3 billion in assets—points to that improving market outlook, and if nothing else, also speaks of changing investor sentiment toward the country. Year-to-date, EWZ has now rallied more than 35%, as the chart below shows:

“In a country with a system of governance as deeply flawed as Brazil’s, it would be too much to expect that whoever comes next will simply flip a good governance switch,” said Mark Dow, founder of Dow Global Advisors and an expert on emerging markets. “However, there are two reasons why it would be wrong to assume things will automatically get worse.”

“One, traumatic change tends to breed honeymoon periods. Hard to imagine there wouldn’t be a sense of relief—at least in the short term,” he said in a blog yesterday. “Two, Brazil’s next leader is unlike to be the next [Fernando Henrique Cardoso] FHC, but he or she will have degrees of freedom to jettison policies that didn’t work—including ones that even Dilma no longer liked but couldn’t afford politically to change.”

Money Returning To Emerging Markets

Brazil’s latest political wrangling comes at a time when U.S. investors seem to be returning to emerging markets, looking for value and growth opportunities in a segment of the market that’s been beaten down for the last few years.

Funds like the iShares Core MSCI Emerging Markets (IEMG | A-98) and the iShares MSCI Emerging Markets (EEM | B-100) have been gathering assets this year, with net creations totaling $206 million and $425 million, respectively, year-to-date. The Brazil-focused EWZ has now attracted more than $430 million in net inflows year-to-date, according to FactSet data.

And to those investors who use currency-hedged funds to access international stocks, the performance of the Deutsche X-trackers MSCI Brazil Hedged Equity ETF (DBBR | F-44) offers a glimpse at how currency impacts returns.

DBBR is a fund that offers exposure to Brazilian firms covering the entire market-cap spectrum, but hedges against Brazilian real exposure. It is now up 23% year-to-date—or roughly 10 percentage points lower than EWZ’s returns, a difference that’s largely tied to the currency move.

Brazil Currency Stabilizes

Economic weakness and government intervention saw the Brazilian real dip to its lowest levels against the U.S. dollar in more than a decade last autumn, and again in January, breaking above 4-to-$1 levels. In the past few weeks, the currency has stabilized, and is now trading around 3.5 to $1.

Charts courtesy of StockCharts.com

DBBR remains a very small fund, with less than $3.5 million in total assets.

Contact Cinthia Murphy at [email protected].