EWZ – September Review: Brazil In A Deep Crisis, Share Market Reacts Accordingly

By | October 6, 2015

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Summary EWZ lost 12% of its value in September. S&P downgraded Brazil to BB+, which is a junk level. The unpopularity of President Rousseff and her government grows. EWZ declined by 40% YTD and it will probably fall further. After falling by 13% in August, share price of the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) declined by another 12% in September. The ETF is down by 40% year-to-date, and it is at levels last seen back in 2005. Although the share price managed to bounce off of the $20 level, it is quite probable that it will retest and maybe even break this level some time in October. The situation is complicated in Brazil. S&P downgraded its credit rating of the country to BB+, which is a junk level. Brazil expanded its austerity measures, cutting agricultural subsidies, infrastructure investments, public health and low-cost housing expenditures. The aim of the new measures is to save approximately $17 billion, as the Brazilian government budget deficit climbed to a scary 9% of GDP. The support for Rousseff’s government keeps on declining. Only 10% of respondents are satisfied with the government, according to a September survey . As a result, the Rousseff opposition grows stronger and anti-government protests occur more and more frequently. The four biggest EWZ holdings remain the same as in August, shares of beverages producer Ambev (NYSE: ABEV ), preferred shares of major banks Itau Unibanco (NYSE: ITUB ) and Banco Bradesco (NYSE: BBD ), and shares of refrigerated and frozen food producer BRF-Brasil Foods (NYSE: BRFS ). Ordinary shares of Banco Bradesco are no longer one of the top 15 holdings, as they were surpassed by shares of Fibria Celulose (NYSE: FBR ), one of the world’s biggest pulp producers. Source: own processing, using data of iShares.com Shares of the airplane producer Embraer (NYSE: ERJ ) rose by almost 11% in September, as the company announced a new deal worth $800 million and its Legacy 450 model gained EASA certification for the European market. On the other hand, ordinary and preferred shares of Petrobras (NYSE: PBR ) declined by approximately 20% after another series of bad news, including new lawsuits against the company. Shares of the mining giant Vale (NYSE: VALE ) recorded significant decline as well, as weak metals prices weight on its financial outlook. (click to enlarge) Source: own processing, using data of Bloomberg After four months of relatively stable correlation between EWZ and Petrobras, which moved in the 0.8-1.0 range, the relation between the Brazilian ETF and former flagship Brazilian company started to weaken. However, we can see that it managed to climb back up at the end of the month. The correlation between EWZ and Petrobras reached an extremely high level of 0.9879 for the 10 trading days preceding September 30. It means an almost perfect positive correlation. The correlation between EWZ and oil prices, represented by the United States Oil ETF (NYSEARCA: USO ), was relatively weak for a better part of September. (click to enlarge) Source: own processing, using data of Yahoo Finance Although the global financial markets were relatively calm in September, especially when compared to August, this statement is not valid for the Brazilian share market and EWZ. The 10-day moving coefficient of variation climbed to the 6% level in late September. It reached a value of 5.84% on September 29, which is the highest level in 2015. Given the current problems the Brazilian economy has to face, it is hard to expect that October will be much calmer for the Brazilian share market. (click to enlarge) Source: own processing, using data of Yahoo Finance Some of the more interesting news: S&P downgraded Petrobras ‘ credit rating by 2 levels, from BBB- to BB. Petrobras is in the junk territory now. In late September, the Gates Foundation Trust sued Petrobras over the corruption scandal. The fund, led by Bill and Melinda Gates, is probably the most prominent plaintiff for now. But not all of the news were negative. Petrobras announced that it produced 2.88 million boe per day in August, which is a new historical record. Another announcement claimed that a new well confirmed the light oil potential in Carcará area at the Santos Basin to the south of Rio de Janeiro. Embraer announced that its airplane model, Legacy 450, gained EASA certification. The deliveries of the business jet to the EU countries can start now. Embraer also announced that SkyWest (NASDAQ: SKYW ) ordered 18 E175 jets. The deal is worth $800 million. Vale issued local infrastructure debentures worth R$1.35 billion. The amount was increased from the originally announced R$1 billion due to high demand for the debentures. The debentures are inflation linked and will bear interest of IPCA+6.6232% p.a. (IPCA – The Nation Wide Consumer Price Index). Vale’s executive board proposed a second installment of 2015 dividends, worth $500 million or $0.097 per share. Fibria Celulose progressed with the financing of its Horizonte 2 Project. It secured a $400 million Export Prepayment Facility. It also announced distribution of 500,000 Agribusiness Credit Receivable Certificates worth R$500-675 million. Itau Unibanco announced that the Chilean authorities approved the merger of Banco Itau Chile and CorpBanca. The merger will take place between January 1, 2016 and May 2, 2016. The new subject will be named Itau CorpBanca, and Itau Unibanco will own 33.58% of it. It is expected that the Brazilian GDP will decline by 2.44% this year. Inflation should climb to 9.29%. The 2015 performance of the Brazilian economy should be the worst since 1990 when it slumped by 4.35% Conclusion Brazil is in a bad shape. Its credit rating was downgraded to junk level, its economy is in a recession and the biggest company is in the middle of a huge corruption scandal, moreover it is highly indebted. People don’t trust Rousseff’s government any more and the political situation is far from stable. Adding to it is the collapsing currency and weak commodity prices, and it is not surprising that EWZ’s share price declined by 40% over the first 3 quarters of 2015. Although nothing can fall forever, it doesn’t seem like EWZ has found its bottom yet. Scalper1 News

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