What Brazil Impeachment Means For ETFs

The Brazilian government officially impeached its president Dilma Rousseff today, putting an end to a process that had been unfolding for the better part of the year. To ETF investors, the news may not have been all that surprising, though it was deemed largely supportive for equity markets in the longer run.

The Brazilian Senate “voted 61 to 20 to convict Rousseff on charges of manipulating the federal budget in an effort to conceal the nation’s mounting economic problems,” the New York Times reported this afternoon, noting that the vote came at a time when Brazil has been faced with one of its worst economic crisis in years.

For ETF investors who own funds such as the iShares MSCI Brazil Capped (EWZ)—the largest Brazil ETF—and VanEck Vectors Brazil Small-Cap ETF (BRF), the last four years coming into 2016 saw these funds bleed 60% and 70%, respectively, as country’s economy worsened and investor confidence faltered.

But since Jan. 1, 2016, both EWZ and BRF have turned around, and staged a rally that all but erased the last four years of losses, as the chart below shows:

Charts courtesy of StockCharts.com

Value Play

Brazil has, in fact, been the best-performing market in 2016, delivering more than five times the gains the S&P 500 has shelled out this year. That’s a sharp turnaround from being the worst-performing emerging market for the two previous years.

Beyond growing optimism about political stability, another key factor buoying investor confidence on Brazil as an investment is value. Share prices of EWZ hit levels not seen in at least a decade earlier this year, dropping even below the credit-crisis lows seen in early 2009.

The leveling of oil prices (as Brazil is a major commodity exporter) and the weakening of the U.S. dollar (which is down about 4% year-to-date) have also been other positive factors.

In the first eight months of 2016, U.S. investors poured a net of $647 million into EWZ, which now has $3.9 billion in total assets.

No Clearer Path For Economy

While the impeachment puts an end to months of speculation, it doesn’t suggest the path is now clear for a Brazilian economic recovery. As the New York Times article puts it, the “impeachment may not restore public confidence in Brazil’s leaders, or diminish the corruption that pervades the country’s politics. To the contrary, many Brazilians note, it transfers power from one scandal-plagued party to another.”

Michel Temer, who’s served as interim president throughout the process, should remain acting president of Brazil until the 2018 elections.

“Brazil’s political system remains highly dysfunctional,” Tyler Mordy of Canada-based Forstrong said recently. “And, importantly, the commodity supercycle—which drove massive flows into the country during the boom years—is over. Until these conditions change, a sustained improvement in economic vitality looks highly unlikely.”

Contact Cinthia Murphy at [email protected].