EWZ: August Review
Summary EWZ share price declined by more than 13% in August. The decline was caused by weak commodity prices, uncertainty on global financial markets and Brazilian political instability. Brazilian GDP declined by 1.9% in Q2 2015, unemployment rate is at 7.5% and inflation rate attacks the 10% level. It is hard to expect any major recovery of EWZ share price anytime soon. Share price of the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) kept on falling in August. Its value declined by 13.3%. The Brazilian share market has been hardly hit not only by the problems of Chinese economy but also by its own economic problems, weak commodity prices and continuing Petrobras corruption scandal. On August 11, Moody’s downgraded credit rating of Brazil from Baa2 to Baa3, with outlook negative. Another downgrade will push Brazilian bonds to the junk territory. The data published in late August showed that Brazilian GDP declined by 1.9% in Q2. It is the biggest decline since 2009. The unemployment rate increased to 7.5% and inflation rate hit a new 12-year high at 9.56%. The bad economic situation and still growing corruption scandal led to a series of demonstrations against president Rousseff. The 15 biggest holdings represent 62.2% of EWZ’s portfolio. The biggest weight have shares of Ambev (NYSE: ABEV ) that represent 10.35% of the portfolio. Slightly lower weight have preferred shares of Itau Unibanco (NYSE: ITUB ). There are preferred shares of 5 different companies (Itau Unibanco, Banco Bradesco (NYSE: BBD ), Petrobras (NYSE: PBR ), Vale (NYSE: VALE ), Itausa-Invetimentos ( OTC:IVISF )) among the TOP 15 holdings. Their cumulative weight is more than 25%. Source: Own processing, using data of iShares.com EWZ shares lost more than 13% of their value and only share price of BMF Bovespa and Vale increased slightly in August. On the other hand preferred shares of Banco Bradesco and Itausa Investimentos declined by 15.51% and 13.33% respectively. Shares of other companies from the financial sector were hit hard as well. The economy is in a bad shape. Brazil has a negative GDP growth as well as high inflation rate and the fiscal and monetary policies can’t tackle both of the problems at once. And downgrade of Brazilian credit rating weighed on the financial sector as well. (click to enlarge) Source: Own processing, using data of Bloomberg EWZ was strongly correlated with oil prices represented by the United States Oil ETF (NYSEARCA: USO ), however this correlation declined notably during the last week of August, as oil price bounced hard off its bottom while EWZ kept on declining. On the other hand EWZ still maintains very high positive correlation with Petrobras share price. (click to enlarge) Source: Own processing, using data of Yahoo! Finance EWZ was highly volatile in August. But it is important to note that given the wild ride experienced during the first seven months of 2015, August was relatively calm for EWZ, despite the turbulent developments on global financial markets. It is hard to expect that the Brazilian share market’s volatility will start to calm down and stabilize anytime soon. (click to enlarge) Source: Own processing, using data of Yahoo! Finance Some of the more interesting news: The Brazilian government approved an austerity measure that should help to balance the government budget and save Brazilian investment grade credit rating. The measure will lead to higher corporate taxes which should increase tax revenues by $2.9 billion. A prosecutor at Brazilian Federal Account Court said that Rousseff broke the fiscal responsibility law. The government was systematically delaying debt repayments to Brazilian state controlled lenders in order to make the fiscal account look better. The money were used for various social programs. It is said that repayments worth $11.6 billion were delayed in 2012 and 2013 alone. According to the Brazilian constitution, president who violates the fiscal responsibility law should be impeached and removed. It is estimated that Petrobras may need to pay more than $1.6 billion to settle the investigations related to the corruption scandal that are held in the USA. But Petrobras denied any ongoing negotiations regarding an eventual payment of a fine. Itau Unibanco announced that between August 5 and August 26, it acquired 30,380,000 of its own preferred shares. According to the share buyback plan approved on July 30, the company is authorized to acquire 11 million of its common and 55 million of its preferred shares, during the time period from August 5, 2015 to August 4, 2016. Conclusion Brazil is in huge trouble. The economy is weak, GDP is declining, inflation and unemployment rates are growing. Not only energies and metals but also agricultural commodity prices are weak. The Petrobras corruption scandal hasn’t been fully resolved yet and there is another scandal, as president Rousseff used some creative accounting to make public finances look better before the last year’s presidential elections. Adding to it the uncertainty on the global financial markets that are afraid of the slowing Chinese economy and the potential U.S. interest rate hike, it is hard to expect any meaningful recovery of EWZ share price anytime soon. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.