Brazilian ETFs See Inflows After Impeachment Talks

By James Eugene

Brazilian-focused exchange traded funds (ETFs) have recorded relatively large amounts of inflows after talks of Dilma Rousseff’s impeachment advanced.  

According to data compiled by Bloomberg, the iShares MSCI Brazil Capped ETF enjoyed inflows of just over $94 million so far this month, approximately 4.7% of its market capitalisation. The iShares Ibovespa, an ETF traded on the Sao Paulo exchange, experienced inflows that totaled $15 million in the same period, with just over half a million dollars been pumped into the ETF on Monday 7th December.

Upon hearing the news last week that Brazil’s lower house had decided to formally start impeachment proceedings against President Rousseff, the Ibovespa jumped by almost 6% compared to the previous day’s opening price.

The Ibovespa reacted “positively” after hearing about impeachment news

Poor ETF Performance

Mirroring the country’s stock market, both the iShares MSCI and Ibovespa ETFs have not performed well this year. The former has shed almost 40% of its value since the start of the year, while the latter has performed as badly, losing around 10% of its value within the same time period.

Year-to-date performance of the iShares Ibovespa and iShares MSCI Brazil Capped ETF

Some of the constituents of the iShares MSCI Brazil ETF have been the major drivers in its decline. For example, Petrobras has dropped due to a corruption probe into the state-owned oil company. According to Benzinga, bank stocks have also suffered. The allocated weight of financial services is around 33% in the ETF, “much larger than the second-largest sector allocation, consumer staples”. Benzinga also noted that “an impeachment attempt is a near-term catalyst for [iShares MSCI Brazil ETF] upside, but if the effort fails and Rousseff remains in power, the ETF and its holdings are likely to tumble”.

Many of the problems stem from economic issue regarding the Latin American powerhouse’s economy. A deep recession, coupled with a downgrade in its credit rating to junk status has only compounded the problems the country is facing. These factors have also led to two ETFs liquidating earlier this year.

Aside from the economy problems, social unrest and a massive corruption scandal have not helped Dilma Rousseff’s cause, culminating in some of the lowest approval ratings during her tenure so far as president.

On Tuesday, Rousseff’s chances of avoiding impeachment were dealt a major blow after Vice President Michel Turner publicly announced his intention to stand against her during the proceedings. Things went from bad to worse after her “pro-impeachment” opponents won majority control in the congressional commission that will be examining her case, gaining 39 out of the 65 available seats. The commission is tasked with making a recommendation to the lower house of Congress, who will then decide whether to remove her from office.

Needless to say, Brazil will be closely watched by many investors across the globe over the next few months.