Rousseff’s Woes, Brazil ETFs’ Gains
June 6th, 2014 at 12:33pm by Todd Shriber
In what may be the last day of noteworthy action in Brazilian equities prior to the start of the World Cup, shares of the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) are up 3.3% Friday after another poll showed declining support for President Dilma Rousseff.
Brazil, Latin America’s largest economy holds national elections in October. “Rousseff’s support fell to 34 percent this month from 37 percent in May,” report Raymond Colitt and Anna Edgerton for Bloomberg, citing a Datafolha poll.
Combined, challengers to Rousseff, including Senator Aecio Neves and socialist Eduardo Campos, garnered 35% in the poll.
EWZ, the largest country-specific ETF tracking a Latin America economy, and other Brazil ETFs, have previously shown an intimate correlation to negative poll news for Rousseff. In late April, EWZ soared to its highest levels since November 2013 a poll from MDA showed Rousseff’s support dipped to 37% from almost 44% in February. [Brazil ETF Pops as Polls Show Rousseff Slumping]
News of the most recent decline in support for Rousseff comes after EWZ plunged 5% in the past month as local and global investors had become skittish about the flailing economy. The country posted first-quarter GDP growth of just 0.2% and is contending with high inflation.
Brazil’s central bank has hiked interest rates by 375 basis points to 11% to stave off a spike in inflation but the tighter monetary policy has pressured economic growth. Some market observers have speculated that if Rousseff does not win reelection, Brazilian interest rates are likely to decline. [Brazil ETFs Flail]
Brazil’s higher interest rates have boosted shares of its financial services companies. That sector is the largest in EWZ at a weight of 29.3%. Up 14.5% this year, the Global X Brazil Financials ETF (NYSEArca: BRAF) is the best-performing Brazil ETF, but BRAF is not for the faint of heart as the ETF is about four times as volatile as the S&P 500 Index, reports Eric Balchunas for Bloomberg.
Friday’s pop in EWZ could be the last big day for the ETF until after the World Cup because trading volumes are expected to nosedive across football-crazed Latin America when play commences on June 12. During the 2010 World Cup, volume dipped almost 75% in Brazil on the days of the country’s matches. [LatAm ETFs Will Slow During World CUp]
Goldman Sachs recently endorsed the idea of buying Brazilian stocks on the expectations the host nation will hoist another World Cup. The bank said the winning country’s equity markets rise 3.5% on average in the month following the victory. Interestingly, Goldman owned 14.3% of EWZ at the end of the first quarter, according to Bloomberg.
iShares MSCI Brazil Capped ETF