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EWZ – November Review: The Political Crisis Deepens
Summary Share price of the iShares MSCI Brazil Capped ETF declined by 1.53% in November. The development was driven mainly by the political factors. The economic situation of Brazil is worsening, the political crisis is deepening and the financial markets would welcome the fall of president Rousseff. The iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) lost 1.53% of its value in November. Although it was up by more than 11% at one point, it lost all of its gains during the last days of the month, as the political crisis deepened and investors started to fear that the government will be unable to enforce the needed economic reforms and budget cuts. The economy is still in a bad shape, the latest data show that it declined by 4.5% y-o-y in Q3, which is worse than expected. The unemployment rate is at 7.9% and growing and inflation is in the double digit area. Shares of the beverages producer Ambev (NYSE: ABEV ) are still the biggest holding in EWZ’s portfolio, with weight of 10.61%. Ambev is closely followed by preferred shares of Itau Unibanco (NYSE: ITUB ) (10.24%). Besides Ambev and Itau Unibanco, only preferred shares of another bank, Banco Bradesco (NYSE: BBD ), have weight over 5%. The 10 biggest holdings represent 61.47% of the portfolio, which is slightly less, compared to 62.22% in October. Generally, no significant changes in the structure of EWZ could be observed in November. Only common shares of Vale (NYSE: VALE )are not among the TOP 15 holdings anymore, as their value declined sharply after the disastrous dam collapse . Source: own processing, using data of iShares.com Out of the 15 biggest EWZ holdings, the biggest gains were recorded by Fibria Celulose (NYSE: FBR ) in November. The credit rating of the pulp and wood producer has improved, it has completed the financial package for its Horizonte 2 project and it declared a dividend that will bring to its shareholders dividend yield over 7%. Shares of the company grew by 8.72% in November. Shares of the Brazilian airplane producer Embraer (NYSE: EBR ) jumped by 7.5%. For Embraer, November was the third consecutive month of very big gains. On the other hand, November was very negative for Vale. After the dam collapse, shares of the miner declined strongly. Preferred shares of Vale lost almost 25% of their value. (click to enlarge) Source: own processing, using data of Bloomberg The traditionally high correlation between EWZ and Petrobras (NYSE: PBR ) share price was disturbed during the first two weeks of November, although it increased back to its normal levels in the end of the month, after the corruption scandal became one of the main topics of discussion again. Also, the correlation between EWZ and oil prices (represented by the United States Oil ETF (NYSEARCA: USO )) and between EWZ and S&P 500 was relatively low or even negative during the better part of the month. One could say that the Brazilian share market lived its own live and the share price development was driven by the political situation in the country and by the efforts to enforce the austerity measures. (click to enlarge) Source: own processing, using data of Yahoo Finance November was a relatively calm month for EWZ. Although the EWZ share price was up by 11% only a couple of days before the end of the month, but eventually ended the month with a 1.5% loss, the overall volatility measured by the 10-day moving coefficient of variation was lower compared to most of the 2015. It moved in the 1%-3% range for the better part of November, however it broke out of this range in the last days of the month. Given the early December developments, December will be probably more volatile compared to November. (click to enlarge) Source: own processing, using data of Yahoo Finance Some of the more interesting news: Fibria announced that the estimated capex for the Horizonte 2 Project has been revised from $2.5 billion to $2.2 billion. The expenditures will be funded by a combination of its own cash, Agribusiness Receivables Certificates and credit facilities, the estimated average borrowing cost is only 2% p.a. The company also announced that Moody’s has improved its credit rating from Ba1/Positive to Baa3/Stable. Fibria will pay a dividend of approximately $0.96 per shares, which means a dividend yield of over 7.2%. On November 5, a disaster occurred in southern Brazil. A tailings dam owned by iron miner Samarco collapsed and more than 60 million cubic meters of toxic mud destroyed the town of Bento Rodrigues and contaminated the Rio Doce river. Samarco is a 50:50 joint venture of Vale and BHP Billiton (NYSE: BHP ) and the disaster had a significant impact on share prices of both companies. According to the latest news, Brazil sued Samarco for $5.3 billion over the spill. Cemig (NYSE: CIG ) won generation concessions for 18 hydro plants with total installed generation capacity of 699.57 MW. The new concessions should partially offset the probable loss of the Jaguara and Sao Simao concessions with total installed capacity of 2,134 MW. Companhia Siderurgica Nacional (NYSE: SID ) together with an Asian consortium consisting of ITOCHU Corporation ( OTCPK:ITOCY ), JFE Steel Corporation, POSCO (NYSE: PKX ), Kobe Steel ( OTCPK:KBSTY ), Nisshin Steel ( OTC:NSSSY ) and China Steel Corp. ( OTC:CISEY ) combined some of their assets into a new company Congonhas Mineiros. The new company will consist of an iron ore mine, railroad and port and it will be 87.52% owned by CSN and 12.48% owned by the Asian consortium. A prominent member of the ruling Workers’ Party, senator Delcidio do Amaral, was arrested due to his participation in the Petrobras related corruption. Amaral is a close collaborator of president Rousseff. His arrest further supported the voices calling for Rousseff’s impeachment. Conclusion As the early days of December showed, the Brazilian share market is still strongly affected by the Petrobras corruption scandal and the related political crisis. On December 2, the impeachment proceedings against president Rousseff opened in the lower house of Congress. As a result, the EWZ share price jumped by almost 6% in two days. The financial markets welcomed the vision of a government change and if further developments indicate that Brazil will be able to get rid of Rousseff, EWZ will grow further.
IMF Green Signal Put Yuan ETFs In Focus
The Chinese economy is telling us two different stories at a time. While on one hand, the economy is persistently delivering offhand economic numbers, and even raised hard landing fears at some point of time, on the other, its currency – yuan – received a privileged reserve status from the International Monetary Fund (IMF) recently. Notably, the inclusion of the yuan in the IMF’s reserve currency list gives the economy a cream-of-the-crop class, as this emerging currency will now sit beside the developed currencies like the U.S. dollar, pound, euro and yen. Also, the IMF nod indicates economic stability in China. The IMF’s executive board, which represents the fund’s 188 member nations, recently settled on the fact that the yuan now enjoys a “freely usable” status. The move marked the first change in the SDR’s currency portfolio since 1999, per Bloomberg . Not only this, China’s currency will have a weight of 10.92%, higher than that of the yen (8.33%) and the pound (8.09%), but lower than the euro (37.4%) and the U.S. dollar (41.9%) weight. The move will take effect in October 2016. Why the Move? Though several theories are doing rounds right now, both positive and negative, the IMF viewed it as the consequence of reformative measures presently being undertaken in China. However, one school of analysts addressed the decision as “political,” and is not counting on the easy accessibility of the currency, because the yuan cannot be transferred into other currencies without restrictions. The believer of this school also indicated that the IMF head “realized how bad things are in China, so what she (Christine Lagarde) decided to do was to throw China a lifeline.” This way, the IMF boss can press the Chinese government to launch a total convertibility for its currency. Notably, the Chinese economy is on its way to deliver a 25-year low expansion this year. Despite the roll-out of a flurry of measures, the economy has showed no signs of a steady recovery, and the financial markets remained highly volatile due to extreme risk-taking. Investors should also note that movements in the yuan market have been rampant this year. In August, China’s central bank devalued the currency by 2%, following which yuan posted the largest single-day decline since the historical devaluation in 1994, after the country arranged its official and market rates in a line. Notably, the Chinese authorities follow a trading band around the official reference rate it sets each day for the value of the yuan against the dollar. The Chinese government announced in August that the renminbi’s central parity rate would follow the previous day’s closing spot rates more closely going forward. This indicates China’s intent to make its currency more market-driven. As a result, a section of analysts believe that the actual motive behind this currency move was to prepare the yuan as a reserve currency. Most importantly, the Chinese central bank assured the market that it would promptly intervene in the currency market if depreciation crosses the 3% mark. Busy Trading in Yuan The yuan became the fifth-most active currency for global payments by value in October, with a market share of 1.92%, per the global transaction services organization SWIFT . Not only this, the Chinese currency beat the Hong Kong dollar and the U.S. dollar for payments between Japan and China/Hong Kong in October. Standard Chartered and AXA Insurance estimate that the IMF’s green signal will offer the yuan a minimum of $1 trillion of movement. Needless to say, this historic move makes it important to look at the Chinese yuan ETFs. WisdomTree Chinese Yuan ETF (NYSEARCA: CYB ) The most popular Chinese yuan fund is CYB from WisdomTree. The product invests in short-term, investment-grade instruments in order to be reflective of both money market rates in China available to foreign investors and changes in the value of the yuan against the dollar. The product charges investors 45 basis points a year, but sees decent average volumes of 50,000 shares a day on AUM of over $64.4 million. The fund currently has a Zacks ETF Rank #3 (Hold) with a Low risk outlook. It is down over 1.2% so far this year (as of December 1, 2015). Market Vectors Chinese Renminbi/USD ETN (NYSEARCA: CNY ) For investors seeking an ETN way to target the Chinese currency, CNY is the right option. This product tracks the S&P Chinese Renminbi Total Return Index, which looks to track the performance of the Chinese currency against the U.S. dollar, by rolling three-month non-deliverable currency forward contracts. The fee is a bit higher at 55 basis points a year, while volume comes in below 5,000 shares a day, suggesting a wide bid-ask spread and ever-increasing total costs. The product is down 0.6% so far this year. The ETN currently has a Zacks ETF Rank #3. CurrencyShares Chinese Renminbi Trust ETF (NYSEARCA: FXCH ) This product looks to track the price of the Chinese renminbi net of Trust expenses. The product has amassed about $7.7 million in assets, while it sees weak volumes of around 1,000 shares a day, suggesting a wide bid-ask spread. On the positive side, the ETF has the lowest expense ratio at just 40 basis points a year in the Chinese currency ETF space. The fund has lost 2.7% this year and carries a Zacks ETF Rank #3. Original Post