S&P Downgrades Brazil; ETF Assets Stall

S&P Downgrades Brazil; ETF Assets Stall

Investors anticipate further redemptions from LatAm as ratings agency says outlook is negative  

Editor, etf.com Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

Brazil has lost its investment grade status from a major ratings agency as the country slips into recession, raising concerns over futher redemptions from Brazilian bonds and stalled exchange traded fund (ETF) activity.

S&P said in a note on Wednesday night that Brazil has mounting political challenges and fiscal instability. It also said that there is a “one in three” chance that S&P will lower Brazilian sovereigns’ rating again within 12 months.

The yield on the 10-year Brazilian bond has jumped by almost a third in the past 12 months to 14.9 percent.

Emerging market bond ETFs tend to have a fair weight in Brazil. For example, the $1.8 billion iShares Emerging Markets Local Government Bond UCITS ETF (SEML) holds 9.8 percent in Brazilian sovereign debt. SEML is down 13.6 percent year to date in Sterling terms, but investors might be perked up by the dividend indicated gross yield of 6.8 percent.

The bad news has been consistent for ETF investors, with its equity investments also plummeting. The iShares MSCI Brazil UCITS ETF (IBDZ) has fallen 27.5 percent in three months and 16 percent in five years, in Sterling terms.

Roberto Lampl, head of Latin American investments at investment managers Alquity, wrote today that the Dilma Rousseff’s government is “fatally flawed” and needs to implement reform, rather than hike taxes.

“Brazil is still (though not for long I suspect) rated investment grade by Fitch and Moody’s, though all of these firms are usually behind the curve,” he said. “Brazil is now the second ‘BRIC’ after Russia to lose IG [investment grade status]. Next we’ll see pension funds sell Brazilian bonds as they are limited in holding junk paper, the currency is likely to weaken further.”

The Brazilian Real has weakened an incredible 64 percent versus the U.S. dollar over the last year to $0.26.

“Our exporters should benefit, and I truly believe we should see the market differentiate the real Latam champion countries and stocks,” added Lampl.

The iShares MSCI EM Latin America DIST UCITS ETF (LTAM) has fallen slightly less harder than Brazil alone at minus 11 percent over five years.

There are $5.3 billion worth of assets in Latin America and Iberia exchange-traded products, just 0.2 percent of global ETP assets, according to Blackrock. Year to date investors have made net redemptions of $1.3 billion from these funds as of the end of August.


Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.