After a dismal 2013 and a weak start to this year, Brazilian
markets were one of the best performing emerging markets last week,
and they even outperformed the U.S. market. During the
week-ended March 21, the Brazilian stock market index – Bovespa
Index – gained an impressive 5% as compared to flat returns from
the S&P 500 (read: 3 Emerging Market ETFs Off to a Great Start
in 2014).
Also, the most popular and the largest Brazilian ETF–
iShares MSCI Brazil Capped ETF
(
EWZ) – has gained around 5% in the past one week,
while another product
Brazil AlphaDEX Fund
(
FBZ) has surged 7.2% over the same period.
The impressive performance was fired by the optimism that the
incumbent Dilma Rousseff won’t be elected again as President in the
October 5 general election. Investors continued pouring in money in
the country’s capital markets driving shares higher.
Why are Brazilians against Rousseff?
Owing to poor public services, rising transport costs, corrupt
politicians, slower growth rates, inadequate health and education
services, high inflation level and overspending worries on the
World Cup and the 2016 Rio de Janeiro Olympics, the President has
increasingly become unpopular among the masses. In fact, last
summer, hundreds of thousands of Brazilians took to the streets to
protest against a highly corrupt government.
Most of the Brazilians are strongly against the government spending
huge amounts of money for hosting the FIFA World Cup. They believe
that the amount could have been better utilized in solving the
country’s many problems. The mass scale street outrage did not help
matters and her image was tarnished even more (read: Inside
the Continued Brazil ETF Slump).
Recently, Standard & Poor’s downgraded Brazil’s sovereign debt
rating to BBB-, the lowest investment grade rating, in the wake of
deteriorating government accounts, mounting debt levels and a
sluggish pace of growth. The South American nation, which in 2010
clocked 7.5% growth, saw its growth dwindle to a mere 2.3% in
2013.
What the Recent Poll Results Mean?
However, the past week’s rally slowed somewhat after the poll
results published by Brazil’s top polling firm, Ibope, towards the
end of the week indicated trends contrary to popular belief.
According to the poll, Rousseff is expected to be re-elected for a
second term as well, with 43% of the respondents backing her as
against 15% for Senator Aecio Neves of the main opposition party
PSDB.
While the Ibope poll favored the current President, 64% of the
Brazilian voters want the next president to change the way Brazil
is being administered. Quite expectedly, 63% out of those desire
this change to come from some other president (see all the Latin
American Equity ETFs here).
Will the Rally Continue?
Though the polls suggest a second outright win for Rousseff, the
hope of a defeat for this very unpopular president is what is
currently holding the Brazilian stock markets up. Even popular
research firms believe that the numbers are likely to change
against Rousseff once the election campaign intensifies and the
opposition party gains recognition. The campaign is expected to
gain momentum after the World Cup ends in mid-July.
Apart from this, some of the recent steps taken by the government
seem to be one of the reasons for the current strength. Brazil’s
central bank has made a series of interest rate hikes since last
year to contain inflation. From a historic low of 7.25%, the
interest now stands at 10.75% in Brazil.
Bottom Line
Irrespective of who comes to power, the Brazilian administration
has to take serious steps to plug its structural problems.
Following the sovereign credit downgrade, the rating firm has cut
the credit rating on 13 financial firms and has put another 27
companies on credit watch negative.
Also, the present government’s interference in the private sector
and economy is expected to negatively influence the country's risk
profile. Moreover, the strengthening of the Brazilian real is
expected to put pressure on trade balances, with the current
account deficit hitting a record high last month.
Thus despite the current bullish picture, Brazil ETFs are expected
to have a tough time ahead and the rally might lose steam if the
fundamentals of the Brazilian economy don’t improve. All the
Brazilian ETFs are currently trading in the red in the year-to-date
time frame.
We currently have a “Strong Sell” or “Sell” rating on all the
listed Brazilian ETFs, including EWZ, FBZ,
Market Vectors
Brazil Small-Cap ETF (
BRF),
Brazil Infrastructure Index Fund
(
BRXX) and
Brazil Consumer ETF
(
BRAQ) (read: 3 Country ETFs Hitting 52 Week
Highs).
Thus, long-term investors should wait for some more positive
developments in the Brazilian economy before jumping into the
current rally. However, brave-hearted short-term traders can use
this rally to think about going short on Brazilian ETFs.
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GLBL-X BRZL CON (BRAQ): ETF Research Reports
MKT VEC-BRZL SC (BRF): ETF Research Reports
EMERG-GS BRAZIL (BRXX): ETF Research Reports
ISHARS-BRAZIL (EWZ): ETF Research Reports
FT-BRAZIL AD (FBZ): ETF Research Reports
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